The Legislative Assembly approved in first debate the issuance of $1.5 billion in debt securities in the international market, which in the opinion of the rating agencies, helps to reduce uncertainty about the government's ability to meet its financing needs.
The Treasury Department's initial plan was to issue $6 billion within six years, however, the committee in charge of the file modified the text so that the limit would be $1.5 billion.
The bill that in Costa Rica authorizes the Alvarado administration to issue $1.5 billion in debt in the international market has already taken the first step in the Legislative Assembly.
At the beginning, the Treasury Department requested authorization to issue $6 billion within six years, however, the committee in charge of the file modified the text so that the limit would be $1.5 billion.
In Costa Rica, the Alvarado administration will ask the Congress for authorization to issue Eurobonds in international markets for at least $5 billion.
The Finance Minister, Rocío Aguilar, reported on November 20 that the country's public debt plans include the possibility of attracting more resources in the international market. One of the alternatives would be to place $5 billion in the next four years.
Low interest rates in the international market have favored Costa Rican sovereign debt bonds which are yielding better dividends.
Higher rates paid out by Costa Rican bonds with their associated risk level, coupled with an international context of low interest rates, has led to increased demand for foreign debt bonds, which "... have appreciated between 14% and 30%" so far this year.
The risk premium demanded by investors for the Costa Rican international bond due in 2023 rose from 2.10% to 2.56% between June and September 2014.
Investors could be moving towards a degradation of the sovereign rating of the country, a possibility already suggested by Fitch rating agency.
An article on Nacion.com reports that "... Since last June, the extra rate of return that foreign savers demand for Costa Rican Government's securities in respect to United States Treasuries (so-called risk premium or margin) has gone. "
The government is working on a bond issue in the international market for $1 billion, with terms of between 10 and 30 years.
The bond issue was structured by the Bank of America, Merrill Lynch and Deutsche Bank according to information provided by Jordi Prat, Deputy Minister of Investment and Public Credit.
"The government is considering a new bond issue for 10 years or 30 years, or a combination of both."
The Superintendency of Securities has permitted secondary market trading of the bonds issued by the Republic of Costa Rica which mature in 2025 and 2043.
According to the Superintendency of Securities (Sugeval) for these securities the minimum face value must be $200,000 and the minimum increments after negotiation is $1.000, as in international markets.
The interest rates on these bonds will be 4.5% for 12 years and 5.75% for 30 years.
The new issue of external debt bonds to be released by the Ministry of Finance this year will mature in 2025 and 2043.
As required by law, the maximum amount of the issue will be $1 billion. In this case the Ministry of Finance and structuring banks (Deutsche Bank and Barclays) set the amount at $500 million for 12 years and $500 million for 30 years.
A new placement of Eurobonds has caused bond prices to drop, both in the domestic and the international market.
Nacion.com reports that "the most notorious drop is in the external trading bond which matures in 2023, which was issued last year and whose price in January reached 104%, and which on April 2 traded at 100.86%. "
Douglas Montero, Manager of Floor Trading and International Trading at Mercado de Valores said that "Bond prices are down as a sign that investors are making space for the new issue."
They will be similar to the Eurobonds issued by the Central Government, with the difference that they are not sovereign instruments with state support.
Regarding the timing for making the issuance, Martin Vindas, interim CEO and finance officer for the company, said they are in the preparation period and the plan is to perform the issue in the best way possible so as to get a marketplace advantage.
The total volume of deals was $4.5 billion, and the placement was made with a rate of 4.25%, slightly higher than expected.
From a publication in Pulso Bursátil, a blog by Aldesa:
Costa Rica today launched on the international market a new bond debt in the amount of $1 billion, which will make it the most liquid bond emitted outside the borders of our country, followed by the issue $500 million by the Instituto Costarricense de Electricidad.
In the bidding held by the Costa Rican Ministry of Finance other bidders including JP Morgan, Barclays, Credit Suisse and HSBC have been ruled out.
The Costa Rican government announced that Citigroup and Deutsche Bank will be responsible for technical advice for the placement of up to $4 billion in Eurobonds.
Both their technical as well as economic proposals were the most favorable for the country, according to information from the Deputy Minister of Investment and Public Credit, Juan Carlos Pacheco.
The current rates for investment in dollars available in Costa Rica represent attractive options- which are scarce right now, compared to the international markets.
From a report by Aldesa on its blog Pulso Bursátil:
Interest rates internationally in dollars are still at historic lows and the market consensus suggests that this Thursday, the U.S. Federal Reserve will accompany the statements from its meeting of the Open Market Committee with an announcement of a new monetary stimulus.
The banking industry believes that the issuance of $1 billion in Eurobonds by the government of Costa Rica will push interest rates down, but considers that rates will remain at high levels until the end of the year.
The pressure being exerted by the Treasury on the money market by raising funds from local resources for the payment of state obligations, could be relieved by the placement of $1 billion on the international market, with which, according to Finance Minister Edgar Ayales, "banks could stop the increases in the interest they pay to their depositors. "
The international debt issuance, approved on Aug. 23 by the Legislative Assembly of Costa Rica, will be put on sale in November.
This was stated by the Minister of Finance, Edgar Ayales, who said they have not yet defined where ir will be issued, or who will be the underwriter. He added that contact will be resumed with the banks who may structure the issue, in order to begin preparing the bidding rules.