Background

The Republic of Panama has been one of the strongest and most reliable sovereign credits in the LAC region in recent years, having last tapped the market with its largest deal to date in July 2019, a dual-tranche Eurobond that totalled USD2bn, saw 5x oversubscription, and priced well inside the sovereign’s curve.

But in March 2020, as the sovereign assessed prospects of a new issue, market conditions could not have been more different. For much of February and March, international bond market activity fell to near zero, with huge capital outflows from EM caused by the coronavirus pandemic and its impact on the global economy and risk asset perception.

For issuers, this created not just the standard market-related challenges, but more basic – logistical and physical ones – as many Treasury teams were simply unable to travel to meet investors, or bring the bookrunners’ DCM teams to clients due to lockdowns and travel restrictions.

Typically, Mexico tends to be the first sovereign of the year to dip its toes in the international bond markets, but thanks to a bold approach by the Panama DMO and an established base of investors for this credit, the Republic broke the trend on March 26, opening the markets with an upsized USD2.5bn new issuance that allowed it to secure funding for the year and the necessary liquidity to mitigate the impact of the pandemic.

Transaction Breakdown

Panama was helped by the fact that, typically, sophisticated or frequent issuers are able to close new deals from their home countries without needing to go to New York or other investor locations, noted a banker that worked on this deal. By keeping open communication lines across the different stakeholders – bankers, lawyers and investors – the DMO team was able to minimize the disruption caused by the pandemic, gathering accounts and charging through intraday execution.

Market turmoil created challenges, and there was no adequate pricing on secondary markets at the time. As consensus was seemingly reached on IPTs, conditions shifted and negotiations had to start again. According to the banker, the experience of the issuer’s team was instrumental to the success of the deal.

Notably, and despite deteriorating market conditions, the issuer decided to upsize the transaction to USD2.5bn (from original USD2bn) in order to cover the potential costs of fighting the pandemic, rather than just the general budgetary purposes its proceeds were meant to finance. Unsure which way market sentiment was heading, Panama accepted the new issue premium of 60bp to their existing curve as the new normal, expecting tightening competition for cash among EM economies over the next few quarters.

The issue was launched shortly after the US Fed and Treasury announcements provided the much-needed liquidity boost to the market, which went from being completely dislocated, to a tapering out of the EM sell-off that led to a window of opportunity opening up for emerging market issuers.

The large size of the deal, attractive yield and a juicy new issue premium was good enough for investors, who had pent-up cash liquidity from February and March that needed to be put to work, which in a practical sense meant that no roadshow was required and intraday transaction was closed purely on the technical appeal of the bond.

Strong Demand

The USD2.5bn, which finally priced at 4.5%, saw 3x oversubscription on a high-quality orderbook from mostly US-based and European high-grade accounts, most of which were long-term investors in Panamanian debt.

“Panama has been an improving credit over the last few years, so even though its spreads widened – IPTs more than 1% above the curve, no match to the below 3.5% pricing it was able to secure just a year earlier – they were still comfortable for this issuer, while other sovereigns simply couldn’t afford to come to market on these terms,” the banker explained.

Since then, new issue premia on EM issues have narrowed somewhat, from 60-70bp to 20-30bp. Some have suggested that Panama could have waited out the volatility, but the key was that the issuer’s goals were achieved.

“Ultimately, they managed to be the first – an important achievement – and they secured their funding for the year, including that which they will need to fight the pandemic, which was the most important objective; and the notes were trading 5bp higher on secondary markets a few days later, reflecting the high quality of this credit,” the banker concluded.

The transaction was crucial to revitalizing the sovereign bond space at a difficult time, and providing a benchmark for others, with several Latin American sovereigns following its lead in coming weeks as funding and refinancing needs rose across the region’s nations.

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