Beat Siegenthaler of Commerzbank Securities, the investment banking division of one of Europe’s top banks, reports that on Friday, the DR government announced its desire to conclude the negotiations on a new IMF program by mid-November. He indicates that the IMF has underscored this view with a statement saying that discussions would continue on electricity sector and 2005 budget provisions. Siegenthaler expects a new two-year arrangement worth around US$800 million to be announced. “Once a respective ‘letter of intent’ is signed, the government is likely to announce the terms of the expected debt exchange, possibly towards end-November. We continue to believe that the bond restructuring will be market-friendly, including a maturity extension (possibly by five years) but no haircut on principal or interests,” he writes.
Furthermore, he indicates that Fitch Ratings reported on Friday that the DR would be downgraded to C from CCC+ once the debt exchange is announced. “However, the new bonds would be potentially rated B based on Fitch’s preliminary assessment of the DR’s financial and economic condition.”
Siegenthaler maintains an “overweight recommendation” based on the view that the forthcoming restructuring will be a benign one and that the new bonds are likely to outperform soon after issuance. The exit yield for a potential new 9.04% $2018 (exchanged for the old 9.04% $2013) is likely to approximate 12%, which would be the highest yielding asset among Latin American credits, he reports. Based on the country’s fundamentals, he writes, bond prices should then start to move in line with regional peers such as Jamaica and Uruguay. By comparison, Jamaica (B1/B 105/8% $2017) currently yields 10.6% and Uruguay (B3B $2017) yields 10.2%.