El Salvador announced the results of its tender offer for the 2023 and 2025 global bonds last night (see here). The offer was launched last week and closed on 20 September.
There were few surprises. But the results' announcement was quickly followed by news that the authorities planned a second tender offer in a matter of weeks. The bonds have rallied on the news, but we think default concerns will linger.
Results
In total, the government was able to buy back US$566mn (notional) of bonds in its tender offer, out of a total outstanding of US$1.6bn (notional) in the two issues.
The results show that US$133mn of the 2023s was accepted, out of the US$179mn that was tendered of that bond, while all of the US$433mn of the 2025s that was tendered was accepted. This implies a proration factor of 74.1% and 100%, respectively.
As a result, the principal amount outstanding of the two bonds has been reduced to US$667mn and US$367mn respectively. The 2023s have been reduced by 17% while the 2025s have been reduced by 54% (that is, c83% and c46% of the respective principal amounts remain).
As previously announced, the aggregate amount set aside to purchase the principal accepted, and to pay accrued interest and any premium, was not to exceed US$360mn.
Assessment
All in all, there were few surprises. The results show that participation favoured the 2025s, as the market had expected, although, more significantly, in more general terms – and to no great surprise – the buyback did little to ease the burden of the looming 2023 maturity in January. Yes, the bond has been reduced in size, from US$800mn, but at US$667mn it is still an onerous amount.
Investors will now wait to see what happens next. Absent a credible and coherent financing plan, the government is likely to continue its piecemeal approach – as it moves to something like Plan F – and while the authorities may be able to muddle through, there is little visibility over how they intend to manage the 2023 maturity while their options appear to be narrowing.
Hence, as we noted before, default concerns will likely continue post-buyback, although the signal of willingness to pay may provide some reassurance.
A second tender
Indeed, after the announcement of the results, President Bukele tweeted that the operation was so successful that the government will launch another offer for the remainder of the bonds in eight weeks' time.
Bonds across the curve jumped today on the prospect of a second tender offer, with the '23s up c5.5pts (indicated at US$95.1) and the '25s up 8pts (indicated at US$58.1), at the time of writing (according to Bloomberg on a mid-price basis; changes compared to close 21 September). This compares to tender prices of US$91 for the 2023s and US$54 for the 2025s. The middle of the curve is also up, by c3.5pts, and longer bonds are up c2pts.
However, the size of a second operation, and how it will be funded, is not yet clear.
Investment conclusions
We maintain our Hold on El Salvador bonds at these levels, pending a more detailed macro analysis and assessment of sources and uses of funds, with a price of US$40.9 (yield 24.6%) on the 2032s at the time of writing on Bloomberg (mid-price basis), albeit up 5pts from last week. We don't have specific recommendations on the '23s or '25s.
