Beat Siegenthaler reports that the emerging markets team of Commerzbank Securities has upgraded their recommendation on the Dominican Republic to overweight from marketweight based on a number of positive news it received on Wednesday that confirmed their previously cautious optimism. Amongst the positive news is the fact that the government confirmed the payment of a late US$23.7 million coupon payment on the 9.5% 2006 bond that had been in grace period since 27 September. Also that the government expects to obtain a US$250 million bridge loan from Spain and use the funds to service government debt. Furthermore, also seen as positive is that Temistocles Montas, spokesman for the economic cabinet of the government, reiterated again that the bond restructuring will be market-friendly and not create any problems for the bondholders. The securities firm is also pleased with the announcement from the Central Bank that international reserves had climbed to US$368.3 million on 6 October up from US$276.9 million at the end of July.
Siegenthaler writes that the news confirms their view that the Dominican Republic can afford a friendly restructuring, consisting solely of an extension of maturities (possibly by five years for both the 9.04% $2013 and the 9.5% $2006 bonds but without any haircut on interest and principal. Also confirmed is that the Paris Club has given its approval in principal to a friendly restructuring proposal, to be presented after securing a new International Monetary Fund program. Moreover, he indicates that a new IMF program (possibly amounting to US$800 million ? US$1 billion) could be announced by early November. He highlights that an IMF mission is scheduled to arrive in Santo Domingo next week and is likely to take around a fortnight to negotiate a letter of intent.
“We believe that for a potential new 9.04% $2018 (exchanged for the old 9.04% 2013) the market currently assumes an exit yield of around 12%, which would be the highest yielding asset among Latin American credits,” he writes.
Moreover, he says that once the new IMF program is secured and the friendly restructuring announced, Dominican bond prices should start to move in line with its regional peers. He points out that also to keep in mind is the fact that the DR’s debt-to-GDP ratio is below 60% compared to 130% in Jamaica and 100% in Uruguay, reason why he expects the DR to outperform already in the first half of next year.