After Bond Exodus, Foreigners Courted in Peru’s $6 Billion Swap

(Bloomberg) -- For President Pedro Pablo Kuczynski to succeed in converting as much as $6 billion of Peru’s overseas bonds into local-currency debt, he’ll need to lure back the foreign investors who’ve fled the country in droves in recent years.

The Wall Street veteran who took office in July is asking Peru’s Congress to approve a plan that will include buying back or swapping notes denominated mostly in U.S. dollars, as well as some bonds in soles that mature in the next few years. The nation would aim to finance the deals, which would take place next year, by selling mostly local-currency debt. 

Kuczynski is looking to revive demand from overseas investors who reduced their holdings of sol debt to a five-year low of 34 percent in June and who are now contending with the prospect of higher U.S. interest rates. And there are signs foreigners are coming around. While their holdings are still nowhere near the record high of 58 percent in 2013, they posted their biggest jump in 18 months in August. Yields on the local debt have also tumbled this year as Peru posts the fastest growth among Latin American economies.

“I think they’ll be able to pull this off,” said Sean Newman, a money manager at Invesco Advisers Inc. in Atlanta. “Peru is highly regarded and viewed as being prudent when it comes to fiscal policy.”

Global bond markets have suffered big losses in the past week amid speculation the Federal Reserve will lift borrowing costs next week. Carlos Blanco, Peru’s head of public debt, acknowledges that appetite for emerging-market debt has diminished.

Still, “once we’re passed the Fed question, things will be calmer,” Blanco said in an interview from Lima. “It’s a good time to do responsible liability management.”

Investors have been bullish on Peru since Kuczynski, who was a managing director at First Boston Corp. in the 1990s, won the presidential election in June. He’s pledged to ramp up infrastructure and mining investment to propel growth. He’s also bolstered investor confidence by appointing Alfredo Thorne, a former head of Latin American research at JPMorgan, as finance minister.

Analysts surveyed by Bloomberg expect Peru to post the fastest economic growth among major regional peers for a second year in 2017 while boasting the lowest inflation rate.

And though it may be a challenge to raise $6 billion by selling primarily sol-denominated bonds, Peru has been getting a second look from investors of late, said Andres Uribe, head of investment and treasury at Mapfre Peru.

“Peru’s track record is very good and the change of government has generated a lot of enthusiasm locally and internationally,” he said. “That’s going to help when they want to issue bigger amounts.”

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Michael Tsang at mtsang1@bloomberg.net, Lester Pimentel