El Salvador will buy back part of its debt by surprise

A sign reading ‘Bitcoin accepted here’ is seen at a store where cryptocurrency is accepted as a form of payment in San Salvador, El Salvador October 4, 2021. Picture taken October 4, 2021. REUTERS/Jose Cabezas

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SAN SALVADOR, July 26 (Reuters) – El Salvador’s president on Tuesday announced plans for a voluntary buyout offer to holders of bonds maturing between 2023 and 2025.

The operation would be partially financed by reserves allocated last year by the International Monetary Fund and a loan from a Central American multilateral lender, the finance minister said on Tuesday.

President Nayib Bukele has come under pressure to demonstrate sound public finances as the country’s options dwindle ahead of an $800 million bond maturity in January.

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Its bet on bitcoin, which operates in El Salvador as legal tender alongside the US dollar, has narrowed El Salvador’s financing options as the International Monetary Fund closed the door on a loan of more than $1 billion after the cryptocurrency movement.

In a post on Twitter, Bukele said the country has enough cash to not only pay debt commitments as they come due, but also to buy the debt even before it comes due.

The bond maturing in January was trading at 74 cents on the dollar with a yield of 82%, while the remaining issues were trading in troubled territory hovering in the low 30 cents.

Prices had started to soar last week, partly spurred by a note from Morgan Stanley that Salvadoran debt was too cheap and prices were below most restructuring scenarios.

BUYBACK AT MARKET PRICE

The repurchase process would likely cost about $1.7 billion, according to a Citi Research note released Tuesday that said the estimate should rise based on early market reaction.

“Today we are sending 2 bills to Congress to ensure that we have the funds available to make a transparent, public and voluntary offer to all bondholders of Salvadoran sovereign debt from 2023 to 2025. , regardless of the market price at the time of each trade,” Bukele tweeted, adding that “the market price will likely rise once we start buying all available bonds.”

The unicameral Congress of El Salvador approved the two bills, one to use $360 million in funds from special drawing rights allocated by the IMF to buy back the bonds, and the other to ask for a loan of 200 million dollars to the Central American Bank for Economic Integration (BCIE), in majority votes on Tuesday evening.

The Central American country’s total public debt was about $24 billion in March, according to central bank data.

The debt buyback offer, which was unexpected, will likely drive up the price of short-term bonds, Citi analysts added.

“The risks are high and the situation remains very fluid,” they wrote.

Bukele added that the buyout will start in six weeks.

It was unclear where the remaining over $1 billion would come from to complete the operation.

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Reporting by Nelson Renteria; Additional reporting by Ana Isabel Martinez, Carolina Pulice and Kylie Madry; Written by Valentine Hilaire; Editing by David Alire Garcia, Rodrigo Campos and Leslie Adler

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