Provincial bonds: a cheap, augmented sovereign

Transcription

Argentina Weekly Report
April 30, 2013
Provincial bonds: a cheap,
augmented sovereign
We find that most of the provincial premium over
sovereign yields can be explained by one factor: the
correlation, or beta, with sovereign yields. Factors at
provincial level, such as debt ratios or the fiscal deficit,
the usual suspects in most default theories, have a
secondary role.
Provincial debt premium over sovereign yields is
positively correlated with sovereign yields, i.e., the beta
of provincial debt yields with sovereign yields is above
one. We build our own index of provincial debt and
analyze the beta of both the index and its components,
and find beta explains a large fraction of the spread
over the sovereign.
We believe differences in beta across provinces are
explained by their degree of dependency on
discretionary federal transfers. We also analyze two
additional individual-level macro factors, the fiscal
deficit and the ratio of debt to revenue, and find debt
ratios seem more significant to explain differences
across returns.
We still recommend BUENOS15 based on high
volatility-adjusted carry and sovereign-alike risk. In
our view, the province of Buenos Aires is currently
cheap relative to the sovereign as, despite having a
high beta risk, the dimensions of the province—with
more than 30% of federal income—make it, under
stress scenarios, almost identical to the sovereign.
TO CONTACT PUENTE
PUEN <GO>
+54 11 4329 0000
Head Strategist
Alejo Costa
[email protected]
Strategy
Federico Dorso
[email protected]
Agustin Trella
[email protected]
Research
Leonardo Bazzi
[email protected]
Agostina Nieves
[email protected]
Gaston Sempere
[email protected]
Provincial Debt: A cheap, augmented sovereign
Higher carry than sovereign, but high Beta
We find most of the provincial premium over sovereign yields can
be explained by one factor: the correlation, or beta, with sovereign
yields. Factors at provincial level, such as debt ratios or the fiscal
deficit, the usual suspects in most default theories, have a
secondary role. In our view, this beta is mostly capturing each
province’s dependence on discretionary federal transfers. Both the
province of Buenos Aires and Cordoba, the provinces with the
highest share of discretionary federal transfers, show high betas,
whereas the City of Buenos Aires, the one with the lowest share of
federal discretionary transfers, has the lowest beta. Individual
factors such as debt levels and the fiscal deficit, though relevant,
seem secondary.
A beta-driven premium over sovereign
Provincial debt premium over sovereign yields is positively
correlated with sovereign yields, i.e., the beta of provincial debt
yields with the sovereign is above one. To see this, we build our
own index of provincial debt and analyze the beta of both the
index and its components. Though beta varies across provinces, it
explains a large fraction of the spread over sovereign.
Figure 1. ARBI Index of Provincial spreads over sovereign vs Sovereign (Boden 15)
8%
7%
25%
BODEN 15 (right axis)
ARBI Index
20%
6%
5%
15%
4%
10%
3%
2%
5%
1%
0%
Mar-11
0%
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Source: Puente's own calculations
Please see important disclaimer information on page 6
-2-
Sep-12
Dec-12
Mar-13
We build an Argentinean Regional Bond Index (ARBI), which
weighs the spread of regional bonds in USD over the yield of a
similar sovereign bond. We use bonds from the province of Buenos
Aires, the city of Buenos Aires, Cordoba and Mendoza. The index
weighs them by their liquidity and market cap, so the province and
city of Buenos Aires get 40% and 35% of the index, Cordoba gets
17% and Mendoza gets 8%.
The ARBI index has a 0.38 beta with the sovereign, with half of the
variation in spreads explained by changes in the sovereign itself.
We run the traditional first-step regression of the Fama-Mac Beth
methodology, with sovereign returns as the unique right-hand side
variable and index-component spreads over sovereign as the lefthand variable. For the index, we find a beta of 0.38, with an R2 of
0.55.
Figure 2. ARBI Index of spreads vs Components
12%
City of Buenos Aires
Province of Mendoza
12%
10%
8%
10%
8%
ARBI Index
6%
6%
4%
4%
2%
2%
0%
0%
-2%
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
-2%
Mar-11
Province of Cordoba
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
Sep-11
Mar-12
Sep-12
Mar-12
Sep-12
Mar-13
Province of Buenos Aires
12%
-2%
Mar-11
Sep-11
Mar-13
-2%
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Source: Puente's own calculations
Among the index components, the province of Buenos Aires and
Cordoba show both the higher levels and the higher beta, with the
city of Buenos Aires and Mendoza with the lowest values. Current
index levels are mostly explained by the high spreads of the
provinces of Buenos Aires and Cordoba, with the city of Buenos
-3-
Aires at a negative spread with respect to the sovereign and
Mendoza at a level around its historical average. For the provinces
of Buenos Aires and Cordoba, betas with sovereign yields are 0.65
and 0.50, with regressions on sovereign yields showing R2 values at
0.67 and 0.42, which means sovereign returns alone explain a large
chunk of the variation in spreads. On the opposite side, for the city
of Buenos Aires and Mendoza betas are 0.02 and 0.05, and R2 are
negligible. In our view, the results suggest this “beta” is, in a large
part, responsible for differences in spreads across provinces.
Differences in the issuance law could also play a part, as the bond
we use as a sovereign reference, the BODEN15, is ruled under
Argentinean law, but provincial bonds are ruled under foreign law.
The difference seems particularly relevant for the city of Buenos
Aires, as the BUEAIR15 bond we use for the index is ruled under
UK law. We believe the UK law gives the city of Buenos Aires bond
an additional option value in case of a default, and partly explains
negative spreads with the sovereign.
Table 1. Correlation (beta) of ARBI index of provincial
spreads and its components with sovereign yields
Index component
Beta
ARBI Index
Province of Mendoza
Province of Córdoba
Province of Buenos Aires
0,3466
0,0222
0,0524
0,4509
0,6164
Source: Bloomberg and Puente's own calculations.
From beta to macro factors
We believe differences in spreads across provinces are grounded
on two groups of factors:
•
“Beta” factors, related to the correlation with federal
variables: a higher correlation than sovereign bonds to
macro variables would make provincial debt riskier under
bad scenarios, and hence introduce a premium over the
sovereign.
•
Provincial-level factors: these factors are idiosyncratic to
each province, and can increase or reduce default
probabilities, affecting the premium with respect to other
provincial bonds.
-4-
The first group dominates for the provinces of Buenos Aires and
Cordoba, the second for the city of Buenos Aires and the province
of Mendoza. We suspect differences in beta across provinces are
explained by their degree of dependency on discretionary federal
transfers. Among individual-level macro factors, we find debt
ratios seem more significant to explain differences across returns.
Ideally, we would like to follow a cross-sectional regression
approach, but the small numbers of bonds does not allow us to
follow this second step in the Fama-Mac Beth methodology. As a
result we cannot pin down the relevance of each factor in the
cross-section, and simply provide a qualitative assessment and
some evidence for the last two years.
Among “beta” factors, we look at two macroeconomic variables
with the potential to exacerbate provincial risk relative to
sovereign risk: discretionary federal transfers and domestic GDP.
Discretionary federal transfers, the part of federal transfers
excluded from the legal pre-determined distribution criteria, tend
to be an adjustment factor at federal level budget, and are used as a
moral suasion tool by the federal government to command
provincial policy. The provinces of Buenos Aires and Cordoba,
which have the highest betas, are also the provinces with the
highest share of discretionary transfers as a fraction of total
revenue. Furthermore, in the case of the province of Buenos Aires
those transfers are more correlated with the cycle than federal
revenue, a result in line with a higher beta in spreads, as bad states
look even worst for the province, and hence are more heavily
penalized. Correlation with the GDP cycle does not seem to be a
factor in other provinces, as neither discretionary transfers nor
total revenue show a higher correlation to the cycle than federal
revenue itself.
Table 2. Debt and Fiscal Indicators by 2012
Province
Discretionary
Debt/Revenue Deficit/Revenue Transfers/Total
Revenue
Prov. Mendoza
Prov. Cordoba
Prov. Buenos Aires
20%
35%
45%
81%
-5%
-5%
-4%
-15%
3%
5%
6%
8%
Source: Economia y Regiones
Among individual factors, we look at debt ratios and fiscal deficits,
variables commonly used in models of sovereign default. Recent
data suggests debt ratios have a larger role than fiscal deficits in
-5-
explaining differences across spreads, but both seem secondary.
Debt ratios are in line with premiums over sovereign, with the city
of Buenos Aires showing the lowest figure and the province of
Buenos Aires at the other side of the spectrum. The ratios are,
however, low for international standards. Fiscal deficits seem to
have a minor role: in 2012, except for the province of Buenos Aires,
there were no major differences in the ratio of deficit to revenue,
but spreads varied widely. Only the province of Buenos Aires
differentiates itself, with a three-time higher deficit-to-revenue
ratio. Overall, the evidence suggests a secondary role for these two
variables, as debt ratios are low for international standards and
differences in deficits are not in line with differences in spreads.
Table 3. Elasticities with respect to GDP growth
Federal Government
1,54
1,40
Discretionary
transfers
--
Prov. Mendoza
Prov. Córdoba
Prov. Buenos Aires
1,52
1,43
1,58
1,45
1,07
1,15
1,27
1,24
-1,16
0,20
0,01
2,21
Region
Revenue Expenditure
Source: INDEC and Puente's own calculations.
Figure 3. Deficit as % of Revenue
20%
15%
Prov. of Mendoza
Prov. of Cordoba
Prov. of Buenos Aires
10%
5%
0%
2005
2006
2007
2008
2009
2010
2011
2012
-5%
-10%
Source: Economia y Regiones
For 2013, we expect spreads to be driven mostly by sovereign risk
through beta factors. We also expect a slight deterioration in fiscal
accounts, mainly driven by higher debt payments, which should
have a marginal effect on spreads, as it is mostly expected. We
-6-
forecast primary deficits for Cordoba and Mendoza to increase
faster than revenue, but the city and the province of Buenos Aires
should show improved deficit-to-revenue ratios. Overall, funding
needs should be mildly higher—in real terms—than in 2012, as
higher economic growth and controlled wage increments around
25% will partially counterbalance higher debt payments. All in,
provinces should end the year in a financial situation very similar
to the one observed in 2012.
Strategy: Go with high beta BUENOS 15
We still recommend BUENOS15 based on a high volatility-adjusted
carry and a sovereign-alike risk. In our view, the province of
Buenos Aires is currently cheap relative to the sovereign as, despite
having a high beta risk, the dimensions of the province—with
more than 30% of federal income—make it, under stress scenarios,
almost identical to the sovereign.
We believe the high beta of province of Buenos Aires spreads with
sovereign yields is mostly explained by the dependency of Buenos
Aires province revenue on discretionary federal transfers, highly
correlated with the economic cycle. But in our view, when the
chips are down, default scenarios that include the province of
Buenos Aires will, almost every time, include the sovereign. Even
more, our reference bond, the BUENOS15, is ruled under NY law,
an option value in case of default. Considering the level of
international reserves, which should allow a comfortable debt
-7-
payment schedule at least until 2016, we recommend a high-carry
provincial bond under foreign law maturing before that year.
At sovereign level, we prefer either bonds maturing before 2016,
like the BODEN15, with high volatility-adjusted carry, or the Euro
Discount, as we expect foreign law bonds under UK law to have
better prospects in case of a technical default.
-8-
Appendix
Economic Calendar
Argentinean Regional Bond Index (ARBI)
The Argentinean Regional Bond Index (ARBI) weighs the spreads of
regional bonds in USD over the yield of a similar sovereign bond.
We choose the most representative bonds from the province of
Buenos Aires, the city of Buenos Aires, and the provinces Cordoba
and Mendoza, based on their liquidity and market cap.
The composition and weights of the index are as follows:
• 40% BUENOS15 (Province of Buenos Aires)
• 35% BUEAIR15 (City of Buenos Aires)
• 17% PDCAR17 (Province of Cordoba)
• 8% MDZA18 (Province of Mendoza)
-9-
The beta of provincial debt yields with the sovereign Regression output We estimate the correlation, or beta, between 1) the ARBI index and
Boden 15, 2) each component of the ARBI index and Boden 15. Betas
were estimated through OLS.
The output of estimates are the following:
Elasticities with respect the GDP growth
- 10 -
- 11 -
Argentina Corporate Debt
Company
Sector
Maturity
Next
Payment
Frequency
(months)
Coupon
Residual
Value
Technical
Value
Parity
Accrued
Interest
Price
YTM
Modified
Duration
Credit Rating
S&P
Moody's
Outstanding (in
millio n o f USD)
In USD
Banco Hipotecario 2013
Banks
1-Dec-13
1-Jun-13
6,0
6,0%
0,2
17
99%
0,42
99,3
7,4%
0,5
B-
-
42,8
Banco Hipotecario 2016
Banco
27-Apr-16
27-Oct-13
6,0
10%
1,0
100
91%
90,5
14,2%
2,5
B-
-
224,6
Banco Macro 2017
Banks
1-Feb-17
1-Aug-13
6,0
9%
1,0
102
96%
0,16
2,17
10,1%
3,1
-
B3
105,6
Banco Galicia 2018
Banks
4-May-18
4-May-13
6,0
9%
1,0
104
83%
4,35
87,0
12,7%
3,6
B-
B3
300,0
Banco Galicia 2019
Banks
1-Jan-19
1-Jan-13
6,0
6,0%
1,0
107
89%
2,35
95,5
18,3%
3,9
-
Caa1
229,3
Banco Macro 2036
Banks
18-Dec-36
18-Jun-13
6,0
10%
1,0
104
79%
3,63
78,0
11,1%
8,1
-
Caa3
149,1
Transener 2016
Electricity
15-Dec-16
15-Jun-13
6,0
8,9%
1,0
103
49%
3,40
47,5
69,6%
1,0
CCC
-
53,1
Hid. Piedra del Águila 2017
Electricity
11-Jul-17
11-Jul-13
6,0
9%
1,0
103
80%
2,80
82,0
18,8%
2,1
B-
-
98,8
Edenor 2017
Electricity
9-Oct-17
9-Oct-13
6,0
11%
1,0
101
40%
0,70
40,0
44,9%
3,0
CCC-
Caa1
24,8
Electricity
25-Oct-22
25-Oct-13
6,0
9,8%
1,0
100
48%
0,22
48,5
24,9%
4,4
-
Caa1
Oil and Gas
30-Oct-13
30-Oct-13
6,0
9%
1,0
100
102%
0,08
102,2
4,9%
0,5
B
B1
200,0
Edenor 2022
Petrobras Argentina 2013
95,8
300,0
Petrobras Argentina 2017
Oil and Gas
15-May-17
15-May-13
6,0
6%
108,3
3,7%
3,5
BBB
A3
300,0
Capex 2018
Oil and Gas
10-Mar-18
10-Sep-13
6,0
10,0%
1,0
101
77%
1,47
78,0
17,5%
3,4
B-
-
200,0
Pan American Energy 2021
Oil and Gas
7-May-21
7-May-13
6,0
8%
1,0
104
98%
3,82
98,3
8,4%
5,1
-
B1
500,0
YPF 2028
Oil and Gas
2-Nov-28
2-Nov-13
6,0
10%
1,0
100
106%
0,03
105,8
9,5%
7,9
-
-
100,0
1,0
103
105%
2,74
Oil and Gas
14-May-17
14-May-13
6,0
7,9%
1,0
104
84%
3,70
87,5
14,6%
2,1
B-
B3
374,0
Arcor 2017
Food and Beverage
9-Nov-17
9-May-13
6,0
7%
1,0
104
106%
3,50
106,5
5,7%
3,7
-
B1
200,0
Arcos Dorados 2019
308,6
TGS 2017
Food and Beverage
1-Oct-19
1-Oct-13
6,0
7,5%
1,0
101
107%
0,67
108,0
6,1%
5,1
-
Ba2
IRSA 2017
Real Estate
2-Feb-17
2-Aug-13
6,0
8,5%
1,0
102
94%
2,15
96,3
9,9%
3,1
B-
-
Alto Palermo 2017
Shoppings
11-May-17
11-May-13
6,0
7,9%
1,0
104
91%
3,76
94,5
9,8%
3,2
B-
-
115,0
150,0
Paper
9-Jun-17
9-Jun-13
6,0
6%
1,0
103
109%
2,55
111,5
3,4%
3,6
BBB-
Baa3
270,0
Tarjeta Naranja 2017
Financials
28-Jan-17
28-Jul-13
6,0
9,0%
1,0
102
91%
2,38
93,1
12,4%
2,3
-
-
200,0
Raghsa 2017
Real Estate
16-Feb-17
16-Aug-13
6,0
9%
1,0
102
88%
1,82
90,0
12,6%
2,7
-
B3
100,0
Airport
1-Dec-20
1-Jun-13
3,0
10,8%
0,9
93
93%
1,68
94,4
13,1%
3,3
B-
B3
300,0
Alto Paraná 2017
Aeropuertos Arg 2000 2020
155,7
Autopistas del Sol 2020
Highways
1-Jun-13
6,0
5%
1,0
102
67%
2,11
68,0
16,9%
4,2
-
-
IRSA 2020
Real Estate
20-Jul-20
20-Jul-13
6,0
11,5%
1,0
103
95%
3,29
98,0
12,3%
4,6
B-
-
150,0
IMPSA 2020
Industrial
30-Sep-20
30-Sep-13
6,0
10%
1,0
101
91%
0,95
92,3
12,3%
5,3
B
-
390,0
1-Jun-20
- 12 -
Important disclaimer
This document is for distribution only as may be permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a
citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to
law or regulation or would subject PUENTE to any registration or licensing requirement within such jurisdiction. It is published solely for information purposes;
it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. No
representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this
document (‘the Information’), except with respect to Information concerning PUENTE. The Information is not intended to be a complete statement or
summary of the securities, markets or developments referred to in the document. PUENTE does not undertake to update or keep current the Information.
Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by other business areas or groups of
PUENTE.
Nothing in this document constitutes a representation that any investment strategy or recommendation is suitable or appropriate to an investor’s individual
circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own
judgment in making their investment decisions. The financial instruments described in the document may not be eligible for sale in all jurisdictions or to
certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky.
Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates or other market
conditions. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument referred to in the
document. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Investors should make their own
investment decisions considering such circumstances and obtain such professional and specialized advice as may be necessary.
The contents of this document are based on information available to the general public that was obtained from sources considered to be reliable. However,
such information has not been independently verified by PUENTE, and therefore no warranty, either express or implicit, is given regarding its accuracy,
integrity or correctness. PUENTE does not assume any liability of any type for any negative results arising from the use of this document or its contents.
Investors interested in making an investment should take into consideration that all the instruments are governed by specific legislation as well as by certain
documents approved by the relevant authorities (e.g., prospectus, registration statements, offering memoranda, notices of subscription, pricing supplements,
et cetera), which should include complete and accurate information about the instrument and shall be reviewed by the investors, together with their legal
and financial advisors, prior to making the investment.
Investors should note that the past performance of securities or instruments or the historical results of investments do not guarantee future performance.
The market prices of securities or instruments or the results of investments could fluctuate against the interests of investors. Trades in securities require a
constant supervision of the financial position. Furthermore, investors shall fully understand the chance of total loss of the investment made.
Trades in equity or credit derivatives and high-yield securities may involve higher risks. In case of some investments, the potential losses may exceed the
amount of the initial investment and, in such circumstances investors may be required to pay more money to support those losses. Before undertaking any
trade with these instruments, investors should be aware of their operation, as well as the rights, liabilities and risks implied by the same and the underlying
securities. Investors should also be aware that secondary markets for such instruments may be limited or even not exist.
PUENTE and/or any of its affiliates, as well as their respective directors, executives and employees, may have a position in any of the securities or instruments
referred to, directly or indirectly, in this document, or in any other related thereto; they may trade for their own account or for third-party account in those
securities, provide consulting or other services to the issuer of the aforementioned securities or instruments or to companies related thereto or to their
shareholders, executives or employees, or may have interests or perform transactions in those securities or instruments or related investments before or
after the publication of this report, to the extent permitted by the applicable law.
PUENTE or any of its shareholders, executives or employees may provide oral or written market commentary or trading strategies different from the opinions
expressed herein.
Under no circumstances PUENTE will be considered liable or accountable for the result of the investments made by investors.
Country and Region Specific Disclosures
United States: Distributed only to “Major U.S. Institutional Investors”.
No addressee of this document may distribute nor reproduce this report or any of the parts thereof without the prior written consent of PUENTE. Failure to
comply with these restrictions may breach the laws of the relevant jurisdiction where such unauthorized distribution or reproduction occurred.
- 13 -

Provincial bonds: a cheap, augmented sovereign

Transcription

Similar documents

Venue Profile - Argentina Concert Tours

bio english

Brochure

the vancouver celebration

XIII International Workshop on Urethral Reconstruction

International Relations Theory Evolution of the state system What is

ZZK Records

RANGE Spring 2008-Argentina

patagonia - Speyside Wildlife