Bloomberg News

Goldman Playing Cowboy in Chile Seen Luring U.S. Copycats

February 28, 2013

Goldman Sachs Group Inc. (GS:US)’s plan to sell bonds with a maturity of up to 50 years in Chile may pave the way for more offerings from U.S. companies.

The fifth-largest U.S. bank by assets is seeking authorization to issue bonds worth 20 million unidades de fomento, the country’s inflation-linked accounting unit, which is equal to $966 million, according to Chile’s securities regulator. The offering would mark the first time a U.S. company has sold debt in the country.

Goldman Sachs may help spur more American borrowers to sell bonds in Chile known as “huaso,” or cowboy, after Finance Minister Felipe Larrain relaxed limits to encourage foreigners to sell debt locally, according to insurer Principal Vida Chile. While Goldman Sachs has the option to sell bonds due in 50 years, it’s more likely to issue five- to seven-year notes, Banco de Credito & Inversiones said. A borrower would pay about 0.39 percentage point more to sell five-year bonds in unidades de fomento than in dollars, according to Bloomberg calculations.

“The Finance Ministry has been promoting this and it’s an opportunity for them to diversify their funding,” Felipe Alarcon, an economist at BCI, said in a telephone interview from Santiago. “This is the first U.S. company to issue huaso bonds and that’s very significant and may bring others.”

‘Actively Considering’

Goldman Sachs has 6.15 percent senior dollar bonds due in April 2018 that yield 2.32 percent. Swapping that into Chilean unidades de fomento would leave the borrower paying a yield of about 3 percent plus inflation, according to Bloomberg calculations, or 0.42 percentage point more than central bank and government bonds.

Brazilian lender Banco Pine SA and Mexican homebuilder Corp. GEO SAB are the only foreign companies to sell huaso debt since Larrain first announced the initiative in March 2011. The U.S. bank’s bond plan shows that the policy is bearing fruit, Larrain said yesterday, according to La Tercera newspaper.

Goldman Sachs is selling the bonds in response to the Finance Ministry’s efforts to open the local market, Michael DuVally, a spokesman for Goldman Sachs, said in an e-mailed statement yesterday.

“Chile now has the largest concentration in assets under management per capita in Latin America, which has made the country one of the most attractive new debt capital markets in the region for foreign issuers,” DuVally said.

The bank is “actively considering” opening an office in Chile, he said.

‘Very Appropriate’

Pension funds in Chile manage assets worth 61 percent of Chile’s gross domestic product and equal to almost 120 percent of the nation’s capital market, according to research by Mario Castro, an analyst at Nomura Holdings Inc. in New York.

That compares with 18 percent of GDP in Colombia and 3.1 percent in Mexico.

Chile’s high savings rate and limited number of large companies mean there is a shortage of assets available for investment, according to Valentin Carril, who oversees $5 billion as the chief investment officer at Principal Vida Chile in Santiago and often buys foreign bonds that he swaps back into local currency.

Chile has the fourth-highest gross national savings rate in South America after Venezuela, Ecuador and Bolivia, according to International Monetary Fund data.

‘Further Diversify’

The Goldman Sachs bond sale “is very appropriate for life insurers like ourselves,” Carril said. “It’s diversification and we don’t have to worry about currency derivatives. When the process of opening up markets was announced, I don’t think they really envisaged American companies coming here. It’s big news. This is part of Chile becoming more open to the world.”

Chilean life insurers would welcome a bond due in about 30 years as it allows them to match the average duration of their portfolios with the duration of the annuities they sell, Carril said. The government plans to sell 30-year fixed-rate bonds for the first time this year.

Banco Santander Chile is advising Goldman Sachs on the transaction, according to an e-mailed statement from the Santiago-based bank’s press office.

Goldman Sachs’s offering in Chile will also help the bank “further diversify” its investor base, DuVally said.

Nathan Pincheira, an economist at Banchile Corredores de Bolsa SA in Santiago, says that while Chile has one of the “deepest markets for inflation-linked bonds,” companies can get cheaper financing abroad.

Less ‘Attractive’

The extra cost of selling 10-year inflation-linked bonds in Chile and swapping it back into dollars is about eight basis points, or 0.08 percentage point, according to Bloomberg calculations that exclude the cost of the transaction.

Selling bonds in Colombia would also be cheaper. Its government bond yields have fallen 60 basis points this year, making it about 1 percentage point cheaper to sell notes in Colombian pesos and then swap to dollars.

“I don’t know how attractive it may be from a yield point of view as rates abroad are lower than local ones,” Pincheira said in a telephone interview.

Chile introduced its inflation-linked accounting unit in 1967. Seventy-percent of the country’s local debt market is denominated in unidades de fomento.

The yield on 10-year inflation-linked government bonds fell 10 basis points in February to 2.58 percent. The yield on 10- year fixed-rate bonds dropped four basis points to 5.6 percent.

Default Swaps

The extra yield, or spread, investors demand to buy Chile’s 10-year dollar bonds instead of U.S. Treasuries widened 20 basis points this month to 87 basis points. The spread was at a record low 51 basis points on Jan. 25.

The cost of protecting Chilean bonds against default for five years increased one basis point to 69 basis points at 10:23 a.m. in New York. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if the borrower fails to adhere to its debt agreements.

The peso has appreciated 1.4 percent this year. It gained 0.1 percent today to 472.71 per U.S. dollar.

Chile has a so-called flat yield curve compared with the U.S., which means companies can obtain lower borrowing costs for similar-maturity debt, according to Gonzalo Menendez, the chief investment officer for mutual funds at Cruz del Sur Administradora General de Fondos in Santiago.

Chile’s 30-year inflation-linked bonds yield 2.8 percent, nine basis points more than 20-year debt and 22 basis points more than 10-year notes. U.S. Treasuries due in 30 years yield 3.09 percent, or 1.19 percentage points more than the 10-year securities.

“The local long-term yield curve is very flat; this means that they can pay a lower yield than if they went to sell at a similar maturity in another country,” Menendez said in a telephone interview. “Demand will come mostly from insurance companies, to match their long-term assets with their liabilities.”

To contact the reporters on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net; Eduardo Thomson in Santiago at ethomson1@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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