How I Issued Sovereign Bonds in South America (2)

The procedure for issuing sovereign bonds is, paradoxically, both complicated and simple.

You cannot simply scrawl a figure on a piece of paper, scatter it across the market, and watch the money roll in just because you happen to need it. A credit-rating agency has to weigh in. A lead underwriter has to be selected. An interest rate has to be set, and the paper has to be supplied to the market. Only after passing through countless stages of verification can a government bond finally be packaged as a financial product and sold.

And for the past three years, San Marcos had needed enormous sums of capital — yet it had been unable to walk this path. The reason was simple: the country's credit rating was a C, a grade that amounted, in practical terms, to insolvency.

So Eugene had resorted to a kind of workaround. Through Tortilla Bank — a commercial bank in name, a state bank in all but the paperwork — he had raised funds by selling high-yield savings products in Korea at eight percent a year. In a sense they were sovereign bonds in all but name. But given the nature of the capital, it could not be used as state funds, and its ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠purposes were limited.

Now, however, things were different.

The old debt relationship with Russia had been wiped clean, and the credit rating had been upgraded to BB — speculative grade, caution advised. In Korean terms, it was as if a credit delinquent had completed personal rehabilitation and come out the other side with a score in the 700s. San Marcos had finally earned the right to present its calling card on the international financial markets.

Ahead of the formal bond issue, Ricardo, the Senior Secretary for Finance, released San Marcos's economic growth figures to sharpen the country's investment appeal.

A three-year average of forty-five percent. A number that rivaled Guyana, currently the fastest-growing economy on earth. But growth of that magnitude in a country of more than ten million people was a problem of an entirely different order from Guyana, a nation of barely seven hundred and eighty thousand.

"Nickel mines, the development of a major oil field, the commissioning of a refining plant, and an influx of four million people through the national registration program that detonated the domestic market — these are real numbers," Ricardo said. "Figures you will not find anywhere else in the world."

Pride ran through his voice as he delivered the announcement, and he had every right to it. He had been a member of the cabinet while a country that had been dying on its feet was grown into this.

Overwhelming growth. That was the most powerful weapon San Marcos possessed.

Ricardo then laid out the roadmap for the bond issue before the cabinet.

The moment the terms were made public, the senior secretaries split cleanly in two.

"The rate has been set too low."

"Mexican ten-year paper, with a comparable credit rating, is trading in the eights. Brazil is oscillating around ten percent. However strong our growth may be, a six-percent coupon... we could well be ignored by the market."

"If they don't sell, that will be an embarrassment in its own right. We should raise the rate and protect the investment appeal."

That was the camp that feared the bonds would go unsold on account of the modest yield. And then there was the other side.

"Six percent is more than enough. Don't forget that Guyana, which is posting growth comparable to ours, is currently at five."

"The first tranche alone is a ten-billion-dollar issue. We intend to float a total of forty billion over two years. We cannot price the coupon high from the outset."

"He's right. Even at six percent, the annual interest comes to six hundred million dollars. Two years ago we were a country that couldn't scrape together a hundred million. Let's not forget that."

Six percent, they insisted, was plenty. The two camps were sharply opposed.

"I've heard everyone's views."

In the end, the choice fell to Eugene.

"First of all, the concern that a lower rate will dull the investment appeal is a fair one."

The riskier the emerging market, the higher the interest you had to pay to draw the money in. Investors who passed over the safety of U.S. Treasuries to buy emerging-market paper expected to be compensated for the risk. Eugene set down his teacup and answered as if none of this particularly troubled him.

"Even so, Secretary Ricardo and I settled on six percent for a reason."

He rose from his seat.

"Six-point-five on the first tranche. Six-point-zero on the second. Five-point-seven on the third. Five-point-five on the fourth. We intend to keep stepping the coupon down on every subsequent issue."

"But then the investment appeal—"

"That's right. It will probably be the lowest in Latin America. But what happens if the government itself steps in and takes the risk off the table?"

"...I'm sorry?"

Eugene's meaning was simple and precise.

The room went still.

"We also have an overwhelming rate of economic growth. Over the long run, I believe that will allow us to keep bringing the price of the paper down."

The argument was sound. Every member of the cabinet nodded.

"Well then. I'll take it there are no further objections. Secretary Ricardo."

"Sir!"

"Execute according to the roadmap. I want a complete sell-out. Give it everything you have."

"I will stake my life on it!"

"...You don't need to stake your life on it."

And so, on Eugene's instruction, the coupon on San Marcos's first sovereign bond issue was set.

The Republic of Korea. Seoul.

It was the season when the KOSPI, for the first time in its history, had broken five thousand points, and the entire country had been swept up in a stock-market frenzy. Turn on the news and the index poured out of the screen day after day — but not everyone was smiling.

The world, with its usual cruelty, had split into exactly two kinds of people: those who had boarded the five-thousand-point train early and were popping champagne, and those who had stood there staring and missed the bus.

Kim Young-gwang, who had inherited a seventeen-story building somewhere in Gangnam, was a man who had missed the bus.

Bangbaeg Sageori, Gangnam. The branch manager's office at Shimin Securities.

"Branch Manager."

"...Yes, sir."

"Are you messing with me right now? Everyone else is going crazy doubling, tripling their money on the KOSPI and the Nasdaq, and what about me? Forget profit — I'm down seven percent? I took your word for it, parked the money in that 'safe' overseas fund, and this is what I get?"

"I have no excuse, Chairman. With the Ukraine situation dragging on, the European funds' returns have—"

"Spare me the excuses! I'm pulling every last won out of here and taking it to another firm!"

Kim Young-gwang slammed his teacup down and stood. The branch manager's face went the color of paper. Losing a VIP client who rolled hundreds of billions of won was the sort of thing that cost a branch manager his head.

"C-Chairman Kim! Please, just a moment! As an apology, I've brought a product that's genuinely airtight!"

"Hah! Trying to pawn off another bizarre fund on me? I'm not buying."

"It isn't a fund! Not this time. These are sovereign bonds. Principal-loss risk is as close to zero as it gets!"

Kim Young-gwang paused, then snorted.

"Then the yield's going to be peanuts. How's that any different from a bank? I might as well just open a savings account."

"It isn't like that at all. Five-year paper, locked coupon of six-point-five percent a year. Park it for five years and you're looking at a thirty-two-point-five percent return."

"Six-point-five... percent?"

Kim Young-gwang's interest was piqued. A sovereign bond — a reasonably safe asset — paying six percent was a number that could make a man lean in.

"Which country's bonds? Venezuela? Some little African state with rebels running around?"

"Neither. The Republic of San Marcos, in Latin America."

"San Marcos..."

"Yes. It's been all over the news lately, hasn't it? The country with the Korean president."

"Ah, that place? I think I know the one... but is it safe?"

"They're issuing the first tranche now, and the collateral is crude from an oil field. What collateral on earth is safer than that?"

The branch manager held out a tablet. On the screen was a photograph of President Eugene Choi shaking hands with the chairmen of Korean conglomerates, and beside it a chart of San Marcos's explosive economic growth.

Kim Young-gwang swallowed.

The truth was, he remembered San Marcos. A few years back, a place called Tortilla Bank had been selling eight-percent savings accounts, and he had hemmed and hawed and let it slip through his fingers — a memory that still ached.

"This... this is solid?"

"As solid as it gets. Every brokerage in Yeouido is at war over allocation right now. I'm telling you first, Chairman, as a courtesy."

Kim Young-gwang dropped back onto the sofa.

"I'll trust you one last time. Tell me what ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠you're going to do for me."

"Yes, sir. First we unwind the fund that's currently at a loss, pool it with the cash in the account, and if we purchase at this size, the yield works out to roughly..."

The branch manager launched into the pitch of his life.

Needless to say, Kim Young-gwang was not the only one.

"Manager, this is really just between us, right?"

"Of course, ma'am. I haven't breathed a word to anyone else."

A sure thing ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠began to spread, with Gangnam as its center.

"San Marcos bonds? The president's Korean, isn't he?"

"Oh my, I saw it on the news. That young president? He's quite handsome, and he looks terribly clever."

"Never mind his looks — the collateral is an oil field. An oil field! Have you ever seen a country that gushes oil go under? And the interest is six-point-five percent. Gangnam building yields don't even hit three these days. This is free money."

Before long, the well-heeled ajummas who had a little money to play with were passing the word among themselves.

"Then I'll throw in a billion won and see."

"I'll do five hundred million. I've got a slush fund the husband doesn't know about. I'll use that."

Soon enough the rumor had jumped the banks and reached the teller windows of the commercial banks.

"Ma'am, deposit rates have been so low lately, haven't they? There's a rather attractive foreign-currency bond product that's just come out..."

"Bonds? Aren't those risky?"

"Oh, come now. You've heard of San Marcos, haven't you? All the Korean companies are over there building factories. The country's growing like a weed. And because you're investing in dollars, if the exchange rate rises you'll pick up the currency gain on top."

"San Marcos... it's doing that well?"

"You have no idea. My younger brother's posted there as an expatriate, and he's living large on a dollar salary."

And at last, the rumor burst its banks and poured onto the internet.

And so, on the long-awaited day of the San Marcos bond issuance, the firepower of Korea's retail army exploded.

Conservative investors who had been left on the sidelines of the stock-market mania, and anyone hunting for a stable return, began pouring their capital into San Marcos Sovereign Bonds.