September 08, 2012 10:20 AM
ORANJESTAD - The timing couldn't have been better for Aruba on Thursday as markets rallied on falling US jobless claims and a positive reaction to the ECB's bond back-program, allowing the Caribbean borrower to ratchet pricing downward and build a US$1.9bn book on a US$253m 11-year issue.
Aruba was able to squeeze price talk substantially tighter to 4.75% from 4.875%, before pricing at par to yield 4.625%. By Friday morning, the bond had made decent gains to hit 101.00-101.75.
Credit Suisse and UBS first tested appetite in 5% area after getting initial feedback from investors, reasoning that Aruba's ratings and debt-to-GDP metrics were closest to the Bahamas (A3/BBB), which had outstanding 2029s trading at 5.40%. The 5% area seemed like a logical place to start, assuming a curve extension between the two maturities was worth about 40bp.
Investors were also heard looking at other higher rated comps for the A-/BBB credit. For instance, the Cayman Islands' 5.95% 2019s (Aa3) were trading earlier this week at around 3.5%, Bermuda's 4.138% 2023s (Aa2/AA-) at 3.40% and Trinidad's 9.75% 2020s (Baa1/A) at 3.25%, tightening from 3.50% when the Aruba deal was first announced.
Against those comps, the Aruba bond looked attractive, but spread differential made sense in the context of the island's comparatively poor fiscal health.
"Aruba has been running a fiscal deficit for four years in a row," said Carl Ross, managing director of investments at Oppenheimer.
Interestingly, the island's economy grew by 8.9% in 2011, but could contract by 2% this year, according to Fitch. This is mostly due to the shutdown of an oil refinery, which Valero is looking to sell to PetroChina. Such a sale could have a positive impact going forward, but for now the shutdown represents a major risk for the country, say analysts.
"In terms of the country's (economy), it is all tourism and the refinery. (The refinery) is meaningful for government revenues and employment," noted Ross.
In the end, the sovereign saw about 148 investors participate in what was the country's largest international bond to date, attracting private banks, insurance companies, US and European money managers, and some hedge funds.
Aruba's new US$235m 10-year average amortizer marks a break with past issues, which were typically very small and essentially privately placed.
While the US$235m size will not qualify the country for index inclusion, it is substantially larger than anything it has sold previously. For instance, in 2008, Aruba issued a US$57.3m 6.05% 2013 via RBTT, and the year before that, it placed a US$45.8m 6.5% 2019 via Bear Stearns.
The illiquidity of existing issues made secondary levels a poor gauge for pricing as the borrower looked to broaden its investor coverage through a larger Reg S/144a deal.
"This is, for all intents and purposes, a new issue because the other existing bonds are very small and by appointment only," said Ross.