EM LATAM CREDIT: Colombia (COLOM): FV € 5Y 9Y 13Y

(COLOM; Baa3/BBneg/BB+neg)

                IPT                           FV

5Y:          4.85% area           as low as 4.625% 

9Y:          6.05% area           5.875%

13Y         6.75% area           6.625%

• The Colombia sovereign proposed issuing € benchmark-sized senior unsecured short and intermediate term securities. Use of proceeds will be to buy back $ bonds, this has implications for our FV analysis. They are now tapping investors’ demand in 5Y, 9Y and 13Y tenors, adding new liquidity to the seasoned, secondary € curve as part of their shifting currency focus.
• We look at the interpolated COLOM € secondary curve as well as the actual seasoned bonds, as Colombia issued a 3-year, 7-year and a long 10-year maturity two months ago.
• We see FV for the proposed 5Y deal as low as z-spr 220bp or 4.625% yield area on the back of the current valuations of seasoned bonds. Specifically, as of CoB, the 2028s were quoted z-spd 162bp to yield 3.87% while the 2032s were quoted z-spd 291bp area to yield approx. 5.47%, which would put a 5-Year at about z-spd 220bp or 4.625% yield area.  However, we note that this looks well inside the theoretical interpolated curve, possibly a reflection, at least in part, of demand in secondary for the shorter end part of the curve, which could be driving valuations lower, especially when considering that the issuer is buying back bonds on the $ curve, including the COLOM $ Apr30 at approx. z-spd 150bp in € x-ccy equivalent, some 30bp inside where it was previously charting (source: Bloomberg). On reflection, the linear-log theoretical curve would indicate valuations closer to z+250bp or 5% yield.
• We see FV for the proposed 9Y deal at z-spd 330bp or 5.875% yield area on the back of the interpolated curve, that is some 20bp inside the seasoned 2036s charting at z-spd 350bp area (approx. 6.25% yield).
• We see FV for the proposed 13Y deal at z-spd 385bp or close to 6.625% yield. That is a 35bp pick up vs the seasoned 2036s.
• The government wants to buy back USD debt funded with lower cost Swiss Franc and Euro debt to lower the interest cost on the debt. The primary fiscal deficit was projected to be worse according to Colombia independent fiscal watchdog CARF, but the 2025 fiscal deficit was projected at 6.7% which was lower than the 7.1% expected earlier this year partly due to this new funding program. Meanwhile, inflation was above expectations last reported for October YoY at 5.5% so the Central Bank has been unable to cut the policy rate further. Fortunately, GDP growth has been stronger than expected at 3.6% YoY for the latest quarter.