Chile’s first cross-border peso bond explained

Author: Danielle Myles | Published: 16 May 2013
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  • Retailer Falabella has become the first corporate to issue a Chilean peso-denominated bond cross-border;
  • As DTCC only clears dollars, an exchange mechanism in the bond documents sees the issuer transfer dollars but leaves investors with the currency risk;
  • LatAm’s closely-correlated currencies is spurring the development of a cross-border, local-currency bond market among LatAm issuers and investors.

The first cross-border, local-currency bond by a Chilean corporate shows that LatAm issuers can benefit from the long-tenors available in the international markets, without currency risk.

The bonds’ popularity with investors from elsewhere in LatAm, combined with the region’s liquidity and closely correlated currencies, signals the development of a regional local-currency bond market.

The April 30 deal saw retailer Falabella issue $500 million US dollar notes and Ch$94.6 billion ($200 million) Chilean peso notes. The peso-denominated tranche is a breakthrough for the region’s corporates, which have struggled to tap international liquidity in their operating currency.

"It is a dream come true," said Conrado Tenaglia, co-managing partner of Linklaters in the US, who acted for the issuer. "Even in a well performing economy like Chile, history shows that mismatches between the currency in which debt is denominated and the currency in which you make your money has been the Achilles heel for many issuers."

While pesos can be raised in Chile’s domestic market, it can’t support the volume or tenors offered through an international deal. Local bonds usually have a tenor of three years, sometimes going up to four years.

Falabella’s 10-year notes have the longest maturity of any peso-denominated bond to-date.

Dollar clearing

The deal’s structural novelty concerns clearing.

The notes were cleared through the Depository Trust & Clearing Corporation (DTCC), and then Euroclear and Clearstream. An exchange mechanism was needed to account for the fact DTCC only settles dollars.

As such, although the note is denominated in Chilean pesos, interest and principal payments are to be paid in dollars, based on an exchange rate stated in the bond’s terms & conditions.

Before each payment date, the conversion agent calculates the amount in dollars based on the set exchange rate, and the issuer transfers the amount in dollars. It overcomes the clearing issue, but leaves the investors with the currency risk

A new LatAm bond market

The deal was roadshowed in the US, Europe and LatAm, but IFLR understands the majority of the peso tranche was placed in the LatAm region.

For LatAm investors, the exchange risk involved in buying local-currency bonds from their neighbours is not as great as it is for those further afield.

"There is a strong appetite among these investors as there is a sense that some of these currencies will be more strongly linked, more closely correlated to each other, than with the US dollar," said Tenaglia.

Similar to the situation in Europe before the euro was introduced, there is growing potential for corporates and sovereigns from LatAm’s strongest economies to issue local-currency bonds overseas.

"There have been other examples in the region, and if you look at Peru, Colombia and Mexico, this is eventually the direction the markets are going," said Tenaglia.

It’s consistent with the region’s growing liquidity, especially among its pension funds. "A mandatory stop for any roadshow in the region is Santiago – and also possibly Lima and Bogota. Even five years ago, this would have been unthinkable," Tenaglia added.

US and European investment in this deal shows that the new market would be boosted by non-regional speculative investors.

"It shows the risk appetite from non-regional investors who are playing the local currency game; trying to take advantage of those currencies’ noticeable appreciation against the US dollar," Tenaglia added.

The high coupon that would attach to these sort of deals is another incentive. Falabella’s peso notes have a coupon of 6.50%, compared to 3.75% for its dollar notes.

Tear sheet

On April 30, Falabella closed its debut international bond offering of $500 million 3.75% notes due 2023 and Ch$94. 6 billion 6.50% notes due 2023.

Fitch and S&P rated both tranches BBB. S&P’s ratings report is available here .

The US dollar notes and Chilean peso notes have been listed on the Irish Stock Exchange's Global Exchange Market.

The issuer was advised by Linklaters, Palma Abogados and Lewin & Cía. Underwriters HSBC, Itau BBVA, Citi were represented by Cleary Gottlieb Steen & Hamilton and Noguera Larrain & Dulanto.

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