Spotlight: Aruba 2023

3 December 2012


Spotlight: ARUBA 2023


Does the picture represent you, the investor, seeking opportunity in “stormy waters”?

In this instance I wasn’t going for something quite so profound but can you ‘Spot the difference?!’ I’m sure you’ve played this game countless times when you were younger, but are your eyes similarly trained to pick out quality investments apart from the ordinary?

Let’s put this into perspective with two recent issues:

Government of Bolivia

Issue BOLIVIA 4.875% 10/29/22
Issue Price 100.00
Current Price 100.60
Yield 4.80%
Credit Rating BB- (Fitch)

Ratings excerpt (Reuters):

“”Bolivia’s ratings incorporate its moderate inflation record, declining dollarization, healthy banking system and stable currency regime,” Fitch said in a statement…

However, the still heavy reliance on commodities for economic activity and a lack of transparency on the health of an unregulated financial sector pose risks of contingent liabilities to the government.”

Gov’t of Aruba

Issue ARUBA 4.625% 09/14/23
Issue Price 100.00
Current Price 100.875
Yield 4.52%
Credit Rating A- (S&P)

Reuters: S&P – “Aruba’s status as a colony of the Netherlands, prosperous economy with per capita GDP of about $25,000, stable democracy, high level of social development, and strong government balance sheet support its creditworthiness. A narrow economic base, limited monetary and external flexibility, and a sizeable gross general government debt burden (which is more than offset by public sector pension assets) are credit constraints…

The recent decision by Valero, the owner of the island’s oil refinery, to suspend operations was a setback to the economy and to the government’s fiscal plans to reduce its deficit in coming years. The refinery, which directly and indirectly employs about 5% of the island’s workforce, is the largest single private-sector employer.”

Bolivia’s major industries include mining and manufacturing and prospectively large natural gas exports, while Aruba is a significant tourist destination, executes oil refining and storage, and has a developing offshore financial sector.

A comparison of political and expropriation risk clearly favours Aruba. Bolivia’s president Evo Morales is known for confiscating/ nationalizing significant foreign-owned enterprises.

So why does Bolivia (even with a shorter life) yield only 28bps higher than Aruba? GREAT QUESTION! What may go some way in explaining this, is the bond bubble we’re currently experiencing. However, this will come to an end at some point…some say as soon as 2014. Furthermore, LATAM’s new issues have been consistently oversubscribed in the range of 2X – 5X this year. Lastly, this was Bolivia’s first international bond issue since 1920.

What that doesn’t change, however, is the significant gap in credit quality between these two bonds. The sentiment amongst many traders is that ARUBA 23s are significantly undervalued and when the haze clears after this ‘storm’ of new issues, they will be in heavy demand. We urge you to do your own research, but it seems like a no-brainer…stable economy, SIX rungs higher than Bolivia on the credit rating scale, and there is size available for your institution to soak up that excess liquidity (for now). We feel that the 4.00% – 4.50% range is where you should be looking for solid, investment grade,10-year paper. Let us have your thoughts, we’d be happy to hear them!

For more information, please contact us at info@nullfirstlinesecurities.com.

Gerard Stephens
Account Executive
Sales and Trading

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