Bloomberg News

Chile May Hold Back on Bond Sale Amid Europe Debt Crisis

June 28, 2011

(Adds detail to timing of sale in first paragraph.)

June 28 (Bloomberg) -- Chile’s government may wait until next year or even 2013 to sell bonds overseas as European leaders struggle to contain the Greek debt crisis, Finance Minister Felipe Larrain said.

“It may be this year, but we haven’t ruled out postponing it, depending on the situation of the markets,” Larrain said in an interview in London today. “We don’t know exactly what will happen with the situation in Europe, which is creating some volatility in the markets.”

The Finance Ministry is “seriously exploring” a possible $1.5 billion sale of bonds in U.S. dollars and pesos with 10- year maturities, Larrain said. The ministry in July sold $1 billion in dollar bonds abroad at 3.89 percent, the lowest yield in the country’s history, as well as $520 million of peso bonds, the first such sale. Larrain said he expected “even better” conditions for the next bond sale.

Greek lawmakers vote tomorrow on a package that’s needed before the cash-strapped nation can tap a fifth loan payment from last year’s 110 billion-euro ($157 billion) rescue. Failure to pass the government’s 78 billion-euro plan may lead to the euro area’s first sovereign default. While Chile has to consider the “contagion effect” from Europe, it “won’t be derailed” because the region makes up about 18 percent of its exports, while about half go to Asia, Larrain said.

‘Delivering’

Chile’s Finance Ministry last year registered with the Securities and Exchange Commission to issue $3 billion of bonds to create a benchmark for local companies.

Investors still have an appetite for the nation’s bonds as the central bank estimates the economy in 2011 could expand as much as 7 percent, which would be its fastest pace of growth in over a decade, Larrain said.

The government is exceeding campaign promises to grow an average 6 percent annually, which is about double the pace of the previous administration that left office in March 2010, he said. Chile’s gross domestic product could expand as much as 6.5 percent in 2011, surpassing the ministry’s official estimate of 6.1 percent growth, Larrain said.

“We are clearly delivering on our promises,” he said. “We deliver on our promises to investors who invest in Chilean bonds and look at the Chilean economy and know that the institutions work in Chile and that we are a serious country and a well managed economy.”

Swaps

The cost of insuring Chilean bonds against default for five years was 77 basis points yesterday, the lowest among major Latin American economies tracked by Bloomberg.

By comparison, five-year credit-default swaps on the region’s two biggest economies, Brazil and Mexico, stood at 119 basis points and 115 basis points respectively. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to comply with debt agreements.

Chile’s swaps have increased by 10 basis points from the end of May as part of an overall market trend, with Brazil and Mexico rising by 14 basis points and 13 basis points over the same period, according to data compiled by Bloomberg.

The peso was little changed at 472.83 per dollar at 1:04 p.m. New York time from 473.02 yesterday.

La Polar, ‘Huaso’ Bonds

The minister downplayed the impact of retailer Empresas La Polar SA’s June 9 notice of irregular lending practices on Chile’s risk profile. Authorities have opened an investigation into alleged consumer-lending fraud and are probing possible instances of insider trading in the case.

“I’m not saying it’s not an issue,” Larrain said about La Polar. “This is a case of fraud, and frauds happen. The best security system will not be immune to theft.”

Chile also may see an increase in so-called “huaso” bond sales in 2011 as part of a government plan to increase the depth and liquidity of the country’s capital markets, Larrain said.

Authorities this year relaxed rules for foreign governments, companies and multilateral banks that want to issue the peso- denominated bonds in Chile. Three peso-denominated bonds, totaling less than $500 million, have been issued by foreigners since they were allowed to do so in 2006.

Companies based in emerging markets are most likely to issue huaso bonds, which are named after the Chilean term for cowboy, Larrain said. The Finance Ministry in May conducted a five-day promotional tour for huaso bonds with about 60 companies in Latin America, attracting “a lot” of expressions of interest, Larrain said.

Raising money in Chile might be cheaper for some companies than issuing debt in their home countries of Brazil, Colombia, Peru and possibly Mexico, the minister said.

“We are competitive for companies,” he said. “We have lower interest rates, better conditions, and institutional investors in our economy which will probably be able to absorb part of this.”

--With assistance from Laura Price and Karen Eeuwens in London and Camila Russo in Santiago. Editors: Richard Jarvie, Harry Maurer

To contact the reporters on this story: James Attwood in London at jattwood3@bloomberg.net; Randy Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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