Chapter 79: That Time I Issued Government Bonds in South America (2)

TL: Skye

The process of issuing government bonds is surprisingly complicated, and yet surprisingly simple.

A country can't just scribble a number on a piece of paper and toss it into the market because it needs money; it needs an assessment from a credit rating agency, it has to select a lead underwriter, and it has to set an interest rate before supplying the bonds to the market.

Only after clearing all those layers of verification can a government bond finally be packaged into a financial product and sold.

And for the past three years, despite desperately needing massive amounts of capital, San Marcos hadn't been able to go through any of that process.

Its sovereign credit rating had been a C, effectively bankrupt, from the very start.

So Yu-jin had resorted to a workaround of sorts.

He had raised funds by selling a high-interest savings product, 8% per annum, to Korea through Tortilla Bank, which was a state-owned bank in all but name.

In a way, it had been as good as a government bond, but given the nature of the funds, the money couldn't be treated as state capital, so its uses were limited.

But things were different now.

The old debts to Russia had been swept away, and the country's credit rating had been upgraded to BB, speculative grade.

In Korean terms, it was like a delinquent borrower finishing personal debt rehabilitation and walking away with a credit score in the 700s.

San Marcos had finally earned the right to hand out its business card in the international financial markets with its head held high.

Ahead of the full-scale bond issuance, Senior Secretary for Finance Ricardo announced San Marcos's economic growth rate to sweeten its investment appeal.

A three-year average of 45 percent.

A figure on par with Guyana, currently the fastest-growing economy in the world.

But for San Marcos, with a population of over ten million, growth like that was a different beast entirely from Guyana and its mere 780,000 people.

"These are real numbers, built on the nickel mines, the development of a major oil field, the refinery coming online, and the influx of four million people through the resident registration program, along with the explosion of the domestic market that followed. You will not find figures like these anywhere else in the world."

Pride seeped into Ricardo's voice as he gave the presentation.

And no wonder; as a Cabinet member, he could claim his own share of the credit for taking a country that had been circling the drain not long ago and growing it into this.

Overwhelming growth.

That was San Marcos's most powerful weapon.

Ricardo then unveiled the roadmap for the bond issuance at the Cabinet meeting.

[Republic of San Marcos Government Bond Issuance] Scale: First tranche, $10 billion. An additional $10 billion second tranche within one year.

Maturity: 5-year notes Coupon rate: 6.0% ~ 6.5%

Once the terms were revealed, the senior secretaries split right down the middle.

"I believe the rate has been set too low."

"Mexico's 10-year bonds carry a similar credit rating and are running in the 8% range, and Brazil's hover around 10%. Even with our growth, a rate in the 6% range... we risk being shunned by the market."

"If the bonds don't sell, that's a humiliation in its own right. We should raise the rate and secure our investment appeal."

On one side, those worried the bonds wouldn't sell because of the low yield.

"Six percent is more than enough. Don't forget that Guyana, growing at a pace similar to ours, currently pays a mere 5%."

"The first tranche alone comes to $10 billion. We're planning to issue a total of $40 billion in bonds over two years; we can't open with a high rate."

"Exactly. Even in the 6% range, the annual interest comes to $600 million. May I remind everyone that just two years ago, we were in a position where even $100 million was hard to come by."

And on the other, those who insisted 6% was plenty.

Two sides, locked in a sharp standoff.

"I've heard everyone's opinions."

In the end, the decision fell to Yu-jin.

"First of all, the secretaries who argue that a low rate undercuts our investment appeal have a point."

The riskier the emerging market, the higher the interest it has to pay to attract money.

Investors demand a premium for the risk when they buy emerging-market bonds instead of safe U.S. Treasuries, after all.

But Yu-jin set down his teacup and answered without a hint of concern.

"That said, there's a reason Senior Secretary Ricardo and I settled on 6% regardless."

He rose from his seat as he spoke.

"6.5% on the first tranche. 6.0% on the second issuance, 5.7% on the third, 5.5% on the fourth. We intend to keep pushing the yield on our future bonds steadily downward."

"But then the investment appeal will..."

"Correct. It will likely be the lowest of any country in Latin America. But what happens if the government steps in and takes the risk off the table?"

"...Pardon?"

Yu-jin's meaning was simple and clear.

"Going forward, every bond San Marcos issues will be collateralized by crude oil from Drump Field. That should make the risk-adjusted appeal come roaring back, wouldn't you say?"

"......"

"And on top of that, we have our overwhelming economic growth. I believe that will let us bring down the cost of our debt over the long term."

It was a sound argument, and every Cabinet member nodded.

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

"Yes, sir!"

"Execute the roadmap as written. I want your absolute best, with a full sell-out as the goal."

"I will stake my life on it!"

"...No, there's really no need to stake your life."

And so, on Yu-jin's orders, the interest rate for San Marcos's first-ever government bond issuance was set.

*

The Republic of Korea, Seoul.

It was the era when the KOSPI index broke 5,000 points for the first time in history, and the entire country was swept up in stock fever.

The news churned out KOSPI stories day after day, but not everyone was smiling.

The world, in its cruelty, had split into exactly two camps.

Those who had boarded the 5,000-point train early and were popping champagne, and those who had stood gaping on the sidelines until the bus left without them.

And Kim Yeong-gwang, who had inherited a seventeen-story building somewhere in Gangnam, was one of the people who'd missed the bus.

Bangbang Intersection, Gangnam. The branch manager's office at Simin Securities.

"Manager."

"...Yes, Mr. Kim."

"Are you playing games with me right now? Everyone else is making a racket about doubling, tripling their money on the KOSPI, the NASDAQ, whatever... and me? Forget profits, I'm down 7%? I took your word for it, put my money in that supposedly safe overseas fund, and this is what I get!"

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

"Spare me the excuses! I'm pulling every last won out and moving to another brokerage, effective immediately!"

Kim Yeong-gwang slammed his teacup down and shot to his feet.

The branch manager's face turned ashen. Losing a VIP client who moved tens of billions of won meant his own head would be the next thing to roll.

"M-Mr. Kim! Just a moment! By way of apology, I've brought you a genuine sure thing!"

"Hmph! Trying to peddle another one of your shady funds? Not buying!"

"No! It's not a fund this time. It's a government bond, with virtually zero risk to your principal!"

Kim Yeong-gwang paused, then snorted.

"Then the returns must be peanuts. How's that any different from a bank? I'd rather just park it in a savings account."

"Not at all, sir. It's a five-year note with a fixed rate of no less than 6.5% per annum. Leave it untouched for five years and you walk away with a 32.5% return."

"Six point five... percent?"

Kim Yeong-gwang's interest was piqued.

A government bond, a relatively safe asset by any measure, paying 6%? That was the kind of offer that turned heads.

"Whose bonds? Don't tell me it's Venezuela, or some tiny African country crawling with rebels."

"No, sir. It's the Republic of San Marcos, in Latin America."

"San Marcos, you say..."

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

"Ahh, that place?! I think I know the one... Is it safe, though?"

"They're issuing their first tranche of bonds, and the collateral is, if you can believe it, crude oil straight from an oil field. Where else are you going to find collateral that solid?"

The branch manager held out a tablet PC.

On the screen: a photo of President Yu-jin Choi shaking hands with the heads of Korea's conglomerates, alongside a graph of San Marcos's explosive economic growth.

Kim Yeong-gwang swallowed hard.

The truth was, he remembered San Marcos too.

A few years back, when some place called Tortilla Bank had been selling an 8% savings product, he'd hemmed and hawed until the chance slipped through his fingers; a memory that still stung.

"This... this is the real deal?"

"Without question. The Yeouido brokerage district is at war right now over allocations. I'm telling you first, Mr. Kim, as a special courtesy."

Kim Yeong-gwang dropped back onto the sofa.

"I'll trust you one last time. Tell me what you can do for me."

"Yes, sir. First, if we liquidate the fund that's currently in the red, combine it with the cash in your account, and purchase about this much, the returns would come out to roughly this much..."

The branch manager launched into the pitch of his life.

It goes without saying that Kim Yeong-gwang was far from the only case.

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

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

The sure-thing product spread outward from Gangnam.

"San Marcos bonds? Isn't that the place where the president's Korean?"

"Oh my, I saw the news. That young president, right? Tall, handsome, and he looked awfully sharp too."

"Never mind his looks, the collateral's an oil field, an oil field! You ever seen a country with oil gushing out of the ground go under? And the interest is 6.5%. Gangnam buildings don't even yield 3% these days; this is free money."

Soon enough, the ladies with money to spare were gathering, and the news traveled along the grapevine.

"Then I'll just try putting in a billion won."

"Me too, 500 million. I've got a slush fund stashed away that my husband doesn't know about; I'll use that."

Before long, the rumors spread to the teller windows of the commercial banks.

"Ma'am, you've been worried about how low deposit rates are these days, haven't you? Well, a very attractive foreign-currency bond product has just come out..."

"A bond? Aren't those risky?"

"Come now, ma'am. You've heard of San Marcos, yes? All the Korean companies are over there building factories these days. The country's growing like a weed. And since you'd be investing in dollars, if the exchange rate climbs later, you'd pocket the currency gains on top."

"San Marcos... is it really doing that well?"

"Don't even get me started. My younger brother is posted there as an expat, and he gets his salary in dollars; says he's living like a king."

And at last, like a dam bursting, the rumors came flooding onto the internet.

*

Title: Yo, San Marcos bonds just dropped lololol (Views: 54,205)

Body: 6.5% fixed annual rate, is this real life? They say it's backed by an oil field, so this is an obvious all-in buy, no? No suckers here who missed the Tortilla savings train, right? Don't sleep on it this time.

ㅇㅇ: Holy crap, jackpot. Where do they sell it? Going all-in with my severance pay.

pp : Wait, an investment that guarantees your principal??

22 : Can't get into the brokerage app;; server must've crashed.

ㄴㄴ: Lmaooo I upgraded my car off the Tortilla savings account I opened three years ago.

99 : YujinChoiHeIsAGod YujinChoiHeIsAGod YujinChoiHeIsAGod YujinChoiHeIsAGod YujinChoiHeIsAGod YujinChoiHeIsAGod

DD: But it's a South American country, isn't that risky? What if there's a coup or something? └ Do you not watch the news? Approval rating's 99.9%. Forget a coup, the people are about ready to put up a statue of the president. └ YOU'RE the one not watching the news. The statue went up ages ago, and there's a giant stone face like Mount Rushmore too. └ Wait, why is this actually true??

OO : Heard the first tranche is a limited run, $10 billion only? Buy now or miss out for good!

And so, the long-awaited issuance day for the San Marcos government bonds.

The firepower of the Republic of Korea's retail investors erupted.

Money from conservative investors who had been left out of the stock market frenzy, and from those chasing steady returns, began pouring into San Marcos bonds.

*****

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