MOLANO:MEJOR QUE TARANTINO

Walter Molano es un consejero de inversores - esto es, un datero - especializado en los mercados latinoamericanos. En su rubro, es uno de los tres mejor cotizados en Wall Street. Publica diariamente un boletín, que suele llegarme. El último, de fecha 9 de julio, trae algunos datos de interés para editores y especialistas en inteligencia económica, en particular, si tienen algún contacto con inversores con bonos de la deuda mendocina en su poder.


The Latin American Adviser

Overview: In the Shadow of the Falls

Emerging market investors continued taking profits on Thursday. The JPM EMBI+ widened 9 points to close at 494. The yield on the 10-year Treasury remained stable at 4.47%. U.S. retail sales were anemic in June, growing only 2.9% y/y. This confirmed our fears that the U.S. economy was not as robust as suggested by some of the hype.

However, emerging market bond investors were more affected by the unfolding events in Russia . Russian bond spreads widened 15 bps, or 1.04%, to close the session at 329. Russian corporates were better offered, as the melodrama in the Russian banking system developed.
The situation appears to be a storm in a teacup. A minor incident that started among a handful of third tier Russian financial institutions was magnified into liquidity problems at some of the second tier institutions and deposit withdrawals at the first tier banks. The problem was aggravated this morning by Alpha Bank's decision to impose a 10% commission on bank withdrawals, leading to a sharp rebuke from the Putin Administration. Most of the damage appears to be self-inflicted and Russia 's credit situation remains sound. Some of the rating agencies even affirmed Russia 's investment grade rating. Nevertheless, the headline effect is forcing some portfolio managers to liquidate Russian positions. The events in Russia sparked emerging market investors to lock in profits in other assets. Brazilian bonds slipped 16 bps, or0.8%, to close at 648. Brazil '40s continued to slide, losing about 1 ½ points to end the day at 94 1/4.

Investors shrugged off the improvement in the Brazilian economy. IBGE reported that Brazil 's industrial production rose 7.8% y/y in May, the highest level in 13 years. Peruvian bonds were also weak, widening out 10 bps to finish the day at 445. There were rumors that the Peruvian government was going to issue $1 billion in new bonds to cover their Paris Club obligations. It was not clear whether the deal would be along the lines of the Russian Aries. We expect copy-cat deals to emerge as bankers salivate over the fees that were made on the Russian Aries.
Venezuela was the
outlier. Although Venezuelan bond spreads expanded 6 bps to end the day at 644, they managed to outperform most of the market. Venezuelan bonds traded through Brazil , marking a setback for our spread recommendation. Venezuela was helped by the spike in oil prices. Crude oil prices jumped over $40 on concerns that there could be a disruption in supplies. Ecuadorian bonds also averted most of the sell off, with spreads widening only 6 bps, or 0.18%, to close at 931. President Lucio Gutierrez agreed to increase the VAT to 13%, ending the social security crisis.

Iquazu was a hotbed of activity yesterday, as the leaders of 8 Latin American countries converged for the Mercosur summit. The activities were on domestic, bilateral and regional levels. At the domestic level, President Kirchner and former President Duhalde met and ironed out their differences.

The two political leaders ended their spat, allowing Argentine bond prices to rise. At the bilateral level, Brazil and Argentina agreed to shelve their nascent trade war. The Argentine government threatened to levy tariffs on a string of Brazilian exports, accusing them of dumping. On a regional level, Mercosur welcomed two new members. Mexico and Venezuela were formally integrated as associate members of the regional trade bloc. Mercosur now encompasses every Latin American county, except for Colombia , Ecuador and the Central American bloc. Although U.S. trade officials are quick to dismiss Mercosur as a dysfunctional rabble, the bloc represents a combined GDP of $1.4 trillion, 388 million consumers and $309 billion in exports.

Mercosur has the clout needed to negotiate with large Asian counterparties, such as India and China . It is also a platform that can take its common concerns to the WTO and global trade talks. Mercosur may not have a great legacy, but it should not be dismissed.

Inspectors began analyzing the terms of the Mendoza restructuring proposal, which we attach. The 188 document held few surprises, given that most of the details were already leaked to the press. The proposal does not provide any reduction in principal, but it extends the maturity to 2018. It drops the coupon to 5 ½% and amortizes the bond. The new bond also provides a structure that allows the Province of Mendoza to continue servicing its foreign debt, even if the holdouts win judgments to attach once the provincial government defaults on its original obligation. So, what is our recommendation? The valuation of the proposal, assuming an exit yield of 15%, is in the high 60s-including the accrued interest that should be paid at the exchange. Our recommendation is based on entry level, risk aversion and scope. Most investors bought Mendoza at much lower levels. The risk associated with the new bonds will be very low, and we believe that the yields should fall to about 12%. This provides some upside. Last of all, a holdout strategy is good for large investors that can absorb the legal costs associated with a workout process. However, it will be overwhelming for many smaller investors. Therefore, we recommend most investors to accept the exchange offer.

 

 

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