We have scheduled a syndication of World Bank Bonds targeting yield of 4.12 % denominated in Chile Peso that mature January 2013 for Thursday the 28th of April. Please contact in advance of the offering if you have interest.
Corporate Bond linked to Chile Peso
The World Bank is offering bonds denominated in the Chilean Peso with a yield of 4.12 % for 19 months. This bond provides a high rating (AAA, Aaa) and diversification to a country with one of the lowest debt structure with a modern economy that we could identify.
US Debt Woes
The US federal deficit stands at $14.62 trillion or 99.32% of GDP which is currently at $14.72 trillion. The White House and Congress continue to struggle with efforts to rein in spending. Estimates for the federal deficit continue to rise to $1.4 trillion in the fiscal year ending in September. Fiscal and monetary policies remain in poor condition. Investors continue to worry about the long-term value of the US Dollar. The US Dollar has been on a long term decline causing a reduction in purchasing power.
Fixed income investors are having a difficult time finding good yields. Currently the Ten Year Treasury yields are under 3.5%, that appears quite low for a ten year investment especially considering the March inflation rates were at 2.68%. At Durig Capital were often finding much higher yields with far shorter maturities, trying to protect our clients risks from the possible continued devaluing of the dollar by moving them into currencies that are much more conservative in their debt than the US.
Chile has pursued sound economic policies for nearly 3 decades. Chile joined the Organization for Economic Cooperation and Development (OECD) in 2010, the first South American nation to do so. Chile is strongly committed to free trade and has welcomed large amounts of foreign investment, and the business climate is generally straight forward and transparent. Chile’s government has received high marks from economists and its citizens for its countercyclical spending in 2009 (financed largely from saved copper revenues to offset the effects of the global economic crisis) as Chile produces about ⅓ of the all the worlds copper. Chile ranks number 11 for economic freedom the highest in Latin America according to surveys while the US ranks number 9. A higher ranking usually translates into more economic prosperity.
Chile has emerged from the recession that resulted from the global economic downturn as well as the economic dislocation caused by the February 2010’s large 8.8 magnitude earthquake 45 miles northwest of Temuco. Economic growth was 1.5% in 2009 and 5.2% in 2010; the economy is expected to grow around 6% in 2011. Chile maintains one of the best credit ratings (S&P A+) in Latin America.
The Chilean government conducts a rule-based countercyclical fiscal policy, accumulating surpluses in sovereign wealth funds during periods of high copper prices and economic growth, and allowing deficit spending only during periods of low copper prices and growth. Public debt is only 6.2% of GDP, which is far lower than most countries.
|Public Debt to GDP||Percentage|
Comparing Chile’s Debt to GDP to the United States: The United States has well over 10 times the debt load based on GDP than Chile.
The World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank has a goal of reducing poverty. By law, all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment.
The above graph is the price in of Copper (solid blue) over Chile’s World Bond debt (red line).
World Bank bonds offer investors the highest credit quality (AAA/Aaa) rating, liquid issues and portfolio diversity opportunities. The bonds are backed by 187 member governments, including the US, Japan, Germany, France, and UK please compare them to other Foreign and World bonds are review here. It appears the World Bank debts by the above graph are greatly reduced when copper prices are high.
|4.12%||EI5322207||Chile Peso||Jan 2013|
|8.52 %||Brazil details here||U4594TP35||Brazil Real||June 15, 2012|
|5.90 %||Turkish details here||U4594TQ75||Turkish Lira||Sep 2012|
The above graph compares our two most recent syndicated global yields for World Bank Bonds in yield compared to Chile.
The World Bank issuing bonds are linked to the Chilean Peso. The Peso currency risk could and will affect the returns of these bonds and possibly in a negative way. This issue will expose investors to the Chilean economy. Chile suffered a recession from the global financial crises. Unemployment reached almost 11% in mid-2009; however, it averaged 8% in 2010. In March 2008, the Chilean Central Bank began a program of buying dollars to slow the appreciation of the peso, and then suspended those operations in November 2008 when the Peso depreciated significantly because of the global financial crisis. The Peso strengthened 8.4% in 2010, and in January 2011, the Central Bank announced it would purchase $12 billion in reserves over 2011 to slow the appreciation of the Peso. The US Dollar and Chile Peso exchange rate is 0.00212603.
World bank is the underlying default risk but based on the AAA rating, strong balance sheet, short maturity, and the high price of copper, it appears that the larger risk is currency fluctuations.
Currency seems to have a high correlation to the price copper. As copper and many metal are gaining new highs in price this should be beneficial to the Chilean economy and currency. One must understand that even though the demand for copper as a transporter of electricity has no functional alternative the commodity price of the metal has and will see very larger swings in value.
Many foreign currency bonds like World Bank Chile often require a larger single bond purchase. To circumvent this constraint, we often combine world bond buyers into a larger institutional sized purchase. In our previous syndicates, we were able to facilitate $10,000 US Dollar purchases and should be able to do the same for this Chile Peso linked bond.
Chile is a fiscally conservative country. Chile’s sound, market-oriented policies have created significant opportunities for foreign investors to participate in the country’s steady economic growth. World Bank bonds denominated in the Chilean Peso offer an attractive yield (4.12%) for a relatively short duration. The high rating (AAA, Aaa) and low county debt load adds to the appeal. The combination of providing our clients higher yield plus protecting our clients against possible dollar declines moving from an overburdened currency debt structure like the US into one of the World’s top tier fiscally conservative countries is why are currently adding this World Bank in Chile Peso denomination to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients currently own these Wold Bank bonds.
To know more about this World Bank bond call our fixed income specialist at 971-327-8847
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