Maturity 2117, Size $2.75 billion, Coupon 7.125%, Yield 7.917%
- Order Book $9.75 billion
- Initial Guidance 8.25%
- This issue comes soon after the US itself considered issuing a 100 year bond.
Lets try to wrap our head around a 100 year bond and put it into perspective. Unless we see a scientific miracle, neither you nor I would probably be alive in the year 2117. So how do we analyse this instrument?
A quick look at the present value of $100 dollars in a 100 years shows us that it is worth only 4.25 cents today, this is due to the power of discounting at 7.917%. This means that out of the $100 investors paid, $99.9575 is the value of the coupons.
For ultra-long tenor bonds, a good parameter to look at is duration. Intuitively, duration can be viewed as the number of years that a bond takes for the initial purchase price to be repaid by its coupons. Here at the issue price of 90, the bond has a duration of 12.63 years. Most of us do expect to live till 2030!
The point that we are driving at is that in ultra-long tenor high coupon bonds, it is the coupons and duration that really matter, as opposed to the redemption of the final principal that is essentially worth close to nothing in today’s terms.
Currently, Argentina’s 100 year bond is also grabbing attention due to its junk ratings, as people normally associate longer tenors with investment grade credits. We have previously seen junk rated 100 year bonds in Asia. For example, Reliance Industries issued a 100 year bond in 1997, well before it, or even India gained their current investment grade ratings. The 10.125% coupon bonds, which celebrated their 20th birthday earlier this year, have rallied a lot and are currently trading at an indicative price of 150.
The investors in the new 100 year Argentina bond will be hoping for a positive outcome, but as the maths shows, the journey (coupons) may be more important than the destination (final maturity) in these ultra-long tenor bonds.