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Uruguay sees demand for local currency ahead of return to bond market

Uruguay has seen heightened institutional interest for a local currency deal as it prepares to raise debt in the international market for the first time this year, according to the country's head of debt management Herman Kamil.

By Miluska Berrospi

NEW YORK, May 12 (IFR) - Uruguay has seen heightened institutional interest for a local currency deal as it prepares to raise debt in the international market for the first time this year, according to the country's head of debt management Herman Kamil.

"There are many reasons we decided to launch the roadshow. Until yesterday US Treasury rates were stable and we have seen institutional investor appetite for a local currency transaction given Uruguay's inflation is decelerating, " Kamil told IFR on Wednesday. 

The sovereign launched a roadshow on May 10, ahead of an expected SEC-registered and/or 144A/Reg S transaction denominated in local currency and US dollars. The deal is being led by Bank of America, HSBC, and Santander.

The timing on the transaction is unclear. The bond market has seen some volatility this week after a data release showed a sharp rise in consumer prices in April, causing inflation fears to resurface and pushing Treasury yields higher.

Still, the transaction could come to market as soon as this week and the LatAm borrower's local instruments are well-liked.

"We already own a good chunk of Uruguay [local currency] and it has done very well," said a UK-based bond investor.

Uruguay, rated Baa2/BBB/BBB-, is generally seen as a strong credit in the region with strong liquidity buffers. It has a precautionary credit line of around US$1.7bn from multilateral organizations CAF, World Bank, and Fondo Latinoamericano de Reserva.

It also has a nearly even split between local and foreign currency obligations in the next 12 months, along with strong vaccination rates, following Chile's lead in the region. 

Inflation for the country has declined significantly since last year to reach 6.75% as of April 2021, from around 11% last year, according to an investor presentation seen by IFR.

"It's interesting because in the US inflation is rising but in Uruguay it's declining," said Kamil. "This has stood out to investors who look at Uruguay confidently due to its fiscal framework and monetary policy framework," he added.

The sovereign has been focusing on local currency issuance for some time with the upcoming deal being the sovereign's third local currency offering in the past four years. 

It was in the market last June 2020 with a local currency inflation-linked 20-year note, which met with robust demand. Prior to that, it was also in the market with a local currency issuance in June 2017 when it sold a new 9.875% 2022 bond. 

"For us, a fundamental pillar in our financing strategy is issuing in local currency, that is the currency in which we collect taxes. We see this strategy as a healthy way to reduce foreign currency risk," said Kamil.

Proceeds of the operation will be used for general treasury purposes and could be allocated toward funding sanitary, social, and economic needs brought on by the Covid-19 pandemic, though the note will not be social or ESG in nature.

Plans ahead

Following the upcoming transaction, the country could return with a second international issuance later this year as it looks to investor demand in Asia. 

"There is interest in the Asian market," said Kamil, noting that the sovereign has not set definite plans. 

Uruguay also continues to look at the ESG market and is exploring a potential sustainability-linked bond (SLB) format, though it is still in an exploratory phase of the potential transaction. 

"We are evaluating the best format for Uruguay. We see advantages in a sustainability-linked bond but we are still analyzing and identifying potential targets," said Kamil. A potential SLB could include targets related to climate goals, he said.

SLBs have soared in popularity in recent months with corporate issuers selling bonds linked to ESG targets. So far, there has not been any sovereign SLB issuers, which could make Uruguay among the first sovereign names to try the structure.

"Our focus right now remains on our local currency issuance. The SLB is not imminent or even something which could happen in the short term. More than being the first, second or third [to issue an SLB] it is important that this format makes sense for our investors and for us," added Kamil.

(Reporting by Miluska Berrospi; Editing by David Bell)

((miluska.berrospi@refinitiv.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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