A US $235 million 12-year bond from the Province of Neuquen got the ball rolling on Thursday for what is expected to be a rush of new issues from Argentinean borrowers after the sovereign's success with its jumbo bond in late April.
The order book topped US $1.5bn on the relatively small trade from Neuquen allowing leads Deutsche Bank and J. P Morgan to tighten pricing by 80bp before launching at 8.625%.
With an eight-year average life, Neuquen's new bond is about 162.5bp wide to the sovereign curve, where the new 2021s and 2026s have been trading around 6.40% and 7.40%, respectively.
"They have moved it in aggressively, which is not surprising as it looked very cheap versus the sovereign at IPTs of 9.5%," said a syndicate manger away from the deal, who calculated fair value on eight-year sovereign debt at 7%.
The deal comes after a decent run-up in EM debt as sentiment for the asset class turns more positive on a more stable backdrop for commodities, dovish monetary policies in the developed world and a weaker dollar.
Argentina's triumphant return last month to the bond markets with a US $16.5bn transaction that drew a line under a decade long legal battle with holdouts has also buoyed sentiment and opened the way for more borrowers to follow.
Indeed, investors may be pricing in some of the supply risks ahead as provinces such as Mendoza, Chubut as well as the City of Buenos Aires prepare deals in the coming months.
Still Neuquen stands out in the crowd. Not only is it home to one of the world's largest shale fields - Vaca Muerta, but it is one of the biggest oil producing provinces in Argentina.
This makes it an appealing play for Jorge Ordonez, senior portfolio manager at Invesco, who likes the structure of the bond backed by gas royalties and Argentina's policy of setting its own hydrocarbon prices.
"You can't think of this as (just a provincial) deal it is a structured sale of receivables," said Ordonez, who noted that the structure has both onshore and offshore trusts to capture royalties to pay bondholders.
"The dollars don't go back into the province's budget and are not discretionary on the province's behalf."
Other accounts however were less enamoured with the deal, which is being done in conjunction with a debt exchange for about US $158.6m of outstanding 7.875% 2021s.
And not all have a very optimistic outlook about EM.
"We are due for a pull back," said one investor. "We have rallied too far too fast and in softer markets these smaller bonds suffer." Jason Trujillo, a senior analyst at Invesco, notes that the asset class still faces headwinds in countries like Brazil and Russia. "We are getting increasingly cautious as spreads get closer to fair value," he said
Bank of America Merrill Lynch noted in a report on Thursday that the rapid tightening in spreads leaves EM vulnerable to a sudden change in risk sentiment.
"The risks continue to be China-induced volatility, slower global growth, commodity weakness and data that support earlier than expected Fed hike," Bank of America analysts warned on Thursday.
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