Flash Report /

Paraguay: Bioceanico new issue – attractive spread pick-up to the sovereign

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    8 May 2019
    Published by

    Paraguay's SPV Bioceanico Sovereign Certificate Ltd is expected to issue US$732.2mn in 15.1-year debut senior secured notes, whose collateral will be "Certificados de Reconocimineto de la Obligacion de Pago" or "CROPS", issued by Paraguay's Ministry of Public Works and Communications.

    The notes will not bear any interest and will be offered at a discount representing the net present value of each note, discounted at the note's yield (expected to be c5.75%, according to initial price talks) on a 30/360 conventional basis.

    The certificates will "constitute irrevocable, direct, general, unconditional and unsubordinated contractual payment obligations payable by the Republic of Paraguay." They will mature in 2034, will have a weighted average life of 8.9 years, and are expected to be rated Ba1/BB/NR. 

    The securities will be "issued upon the completion of certain milestones" related to the construction of the highway known as Corredor Bioceanico. The gross proceeds from the certificates will be deposited in a special-purpose "proceeds account" and will be used to purchase eligible CROPS during an "availability period", which is yet to be determined.

    The payment obligations under these certificates will constitute "public external debt carrying the full faith and credit of (the Republic of) Paraguay".

    The discount yield (of c5.75%) compares with:

    1. Paraguay's US$500mn, 4.70% sovereign bond due 2027, rated Ba1/BB/BB+, currently trading at cUS$104.388 (ALLQ) to yield c4.05% (g-spread 167bps; z-spread 169bps), with a duration of 6.672 years; and
    2. Paraguay's US$1.0bn, 6.10% sovereign bond due 2044, rated Ba1/BB/BB+, currently trading at cUS$113.118 (ALLQ) to yield c5.16% (g-spread 240bps; z-spread 260bps), with a duration of 13.722 years.

    Since this credit should be regarded, in our opinion, as a quasi-sovereign bond and since its payments will be backed by the full faith and credit of the sovereign, we believe that (given its weighted average life), the premium suggested by the initial price talk appears to be quite attractive.

    However, we expect this price talk level to decrease to the low-to-mid 5% range on the back of what we believe will be strong demand. This level would still be c100bps higher than the 2027 sovereign bond mentioned above and at around the same level as the 2044s.