El Salvador Corporate Appeals To HY


Less than three months after El Salvador issued its first sovereign bond, power distributor El Salvador Energy Holdings (ESEH) - a subsidiary of Reliant Energy International Inc. and Electricidad de Caracas - is preparing to issue the country's first corporate bond in the international capital markets.

The sovereign benchmark combined with the rapid privatization of the utility sector in recent years has set the stage for the firm to launch a seven-year $150 million 144A offering as early as this week, sources said, but attracting investors may prove an uphill battle for the little-known credit.

Despite some of the hurdles facing the company, it does have an advantage over most other Latin issuers in its ability to attract crossover accounts, some of which have expressed an interest in the bond.

Co-managers BancBoston Robertson Stephens and Deutsche Bank Alex. Brown are marketing the deal, which is secured by a pledge of the company's shares, to both emerging markets portfolio managers and high-yield investors, due to its high rating and the involvement of Reliant, said a banker working on the transaction.

"El Salvador has a very transparent regulatory environment," said George Schaefer, vice president of finance at Reliant. "The distribution market is completely privatized while generation is 50% private and prices are set against international standards."

The high level of transparency in this commercially driven market, the company's 60% market share and its strong foreign participation have clinched it preliminary ratings that are equivalent to the sovereign ceiling, he said, from both Standard & Poor's and Moody's Investors Service. The two agencies are split, however, on their ratings for El Salvador: S&P has the sovereign at BB+ while Moody's has assigned it an investment-grade Baa3.

The advent of privatizations in the market over recent years has increased the need for international finance in the sector, said Jane Eddy, managing director for Latin American public finance ratings at S&P.

It is not yet clear, though, whether there is a sufficient number of investors willing to take on Salvadoran risk. "El Salvador is not a country that I really watch, it's not liquid enough," said one emerging markets fund manager who passed on the deal. "It's more geared toward the buy-and-hold type of portfolio managers."

The deal's timing so late in the year may also prevent some private placement buyers - traditionally buy-and-hold investors - from participating. "We have very little cash left for the year, so we're going to pass on this one," said a private placement fund manager.