Wednesday, April 13, 2016

REMY II (AND THE ARGIES)

He's really a terrific dog.  I was standing by the kitchen counter when I felt this presence.  Turned and ran into a BIG face lick.  Of course he's about 80 pounds and damn near knocks me over but what a great dog!  Better than some obligors that I have known...bankers, too, for that matter.

The Argie road show goes on.  Nothing solid to report as yet but I think it is fair to say that it is not playing to SRO crowds.  That is not to say this is going to be a flop, just that there is obviously trepidation at the thought of such a credit coming to market so quickly after being, for 10 years, an international pariha.  The amount is not insubstantial either and oh, as suggested, I am told the DeutscheBank's underwriting commitment is waaaaay north of $1 billion.

OK, let's look at this in a manner that is not immediately apparent.  This deal, like most sovereign deals cannot fail.  If it were to fail the political repercussions in Argentina would be immense.  The Macri government, in a very short time has managed to gain the confidence of a far larger portion of the population than was expected.  This is different from just being voted into office for that event was as much of a total rejection and disgust with the previous administration as it was a positive affirmation of Macri's plans.  The agreement with the stand-off creditors has also (surprisingly, in my mind) attracted not only acceptance but highly favorable comment.  An awful lot of that earned good will disappears if the international markets reject this deal.  It cannot fail, and if it does, there had better be a damn good ready-in-place explanation.

Now the way the Argies should have played this is to demand a fully underwritten offer.  That means whether investors buy nary a bond, they have their money.  But that is a HUGE underwriting committment for a junk..ah, non investment grade...rated borrower.  I don't have all the modern tools at my disposal but I have not been able to find a bigger one.  So if this thing doesn't find a home, we have a bunch of underwriters holding non-investment grade debt.

We have gone over this before but it is important to keep firmly in place the rules about underwritten debt.  After a period of time, the unsold portion must either be sold or removed from the status of underwritten debt for sale and placed in some sort of investment account under the assumption that it will be held to maturity.  Different jurisdictions have different rules.  If sold, in  every jurisdiction, the sale price will be used to calculate either a profit or loss from the issue price less commissions.  In many jurisdictions, if the issue is moved to an investment account, the same computation will be used, but not in all.  However, the rating of the investment is certainly in play and will affect the amount of capital required to keep funding the same.  This can get very expensive.   Carrying Argentina risk in a public, regulated institution, will undoubtedly be very expensive these days.  Therefor, from both the standpoints of the issuer and the underwriter, this thing better work........unless when the underwriting really isn't an underwriting.  And that, along with a couple of other things is what we are going to talk about tomorrow with--hopefully--the benefit of more information.  Remy awaits.

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