By Diego Ilan MéndezArgentina is, without a doubt, a land of opportunities. So far in 2024, Merval has accumulated a profit in dollars greater than 40%, while the weighted average price of sovereign bonds rose just over 32% (34% adding interest). To have a comparative reference, in the same period, and having an extraordinary year, the S&P 500 rose slightly above 9%, while the Nasdaq added another notable 10%. In other words, the returns on Argentine assets have been truly enormous this year (even more so since the arrival of Javier Milei to the presidency) even taking as a counterpoint a spectacular year for the North American market. However, such returns come with greater risks, something that many investors prefer not to take. This is where negotiable obligations, or ONs in local parlance, come into play.
To begin, perhaps the most pertinent thing is to clarify what negotiable obligations are. ONs belong to the fixed income universe. They are debt securities with characteristics similar to bonds issued by the Government, but backed by companies. Their individual characteristics can vary greatly, but in general terms they all consist of periodic interest payments and a final or installment principal payment. In addition, they can be issued in different currencies or linked to a series of indices/assets.
The most popular today are dollar-linked bonds (tied to the BCRA 3500 exchange rate or the one published by Banco Nación), those tied to inflation (generally UVA +/- a spread) and the hard-dollar (where there is a difference between dollar payers in Argentina – MEP – and payers of dollars abroad – CCL). There are also variable rate (usually Badlar +/- a spread), although they tend to be less attractive considering that the Badlar rate is determined by fixed-term rates.
Focusing on the instruments hard-dollar, It is curious that, unlike what happens in developed countries, in Argentina corporate bonds tend to be more stable than sovereign bonds. In fact, throughout 2023 they were the defensive instrument par excellence. The flip side of this was that they were also the ones that showed the lowest return, although this is not always the case. The reason behind it? The companies that support them, as long as the selection is justified, have better solvency and better liquidity management than the Argentine State. They also have a better credit history.
In addition, many local companies show remarkable resilience, being able to overcome the most adverse macroeconomic conditions. For these reasons, they are able to take on debt at more favorable rates than those that the Argentine Treasury would capture. However, this does not mean that the returns are bad.
On the contrary, If these companies operated in countries with a better environment, they would probably pay lower interest rates than they currently pay. In other words, there is the possibility of investing in ONs of very solid companies, leaders in their industries, receiving returns much higher than those paid by their comparable companies in regions not so distant, such as Brazil.
At this point it is important to highlight that although a few months ago I selected a ON with appreciation potential was a relatively simple task, today it is no longer so. When observing the credit spreads of Argentine corporate bonds, it is clear that they are approaching, and in some cases improving, their average levels from one of the most bullish periods in Argentine history (January 2017-May 2018). The alternatives that are clearly attractive carry a higher risk of default than we would like to assign to this type of instrument. After all, these are assets that seek to reduce portfolio volatility and provide a relatively certain flow. For this reason, the market is demanding increasing expertise on these assets and selectivity has become mandatory.
Along these lines, at the end of the month, among the most attractive instruments locally is CP17O. This ON of CGC yields 10.6%, well above its counterpart abroad (9.3%). This means that, in the event of an exchange rate opening, it should converge to said rate. Beyond that, its amortizable and short structure makes it a highly defensive asset to navigate volatile times.
Additionally, being slightly below par, it enables a small capital gain in September and March payments while receiving juicy semi-annual coupons. Although we are constructive with the future of the country, locally the ONs Long-term bonds show returns below their foreign peers and we believe that their rates could increase in the event of a release of the stocks. This, magnified by their corresponding durations, would result in a loss of capital (transitory if held until maturity) due to price variation. Therefore, we prefer to maintain a short exposure in a solid, growing company with conservative leverage ratios, waiting for new opportunities.
Lastly, the dollar-linked bonds They represent an appetizing alternative. With the exchange rate gap exceeding 30%, and corporate bonds mostly in positive territory, the work is reduced to trying to predict the exit of the stocks (if there will be one, which we believe there will be).
The reality is that, if the selected bond matures after the exchange rate release and we keep it in the portfolio until its final payment, even if it showed an initial IRR of 0%, it would generate a direct return in dollars close to 30% by eliminating the gap. (it could be lower if we liquidate the position beforehand, so having extremely long bonds can be counterproductive). Logically, the additional potential return does not exist without greater risk. The problem with these bonds, beyond their low or zero coupons, is that, if the gap widens and the maturity is prior to a unification, they will record a loss in dollars.
However, they provide the opportunity to invest in the most important companies in the country in search of an extraordinary return. In this sense, we believe that the dollar-linked bonds maturing in the first half of 2025 (such as YFCEO, CS36O, AER6O or YMCOO) have a high probability of capturing the elimination of the stocks.
PPI Corporate Credit Team Leader.
Source: Ambito
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