The world’s best performing utility bonds come from an unlikely corner of emerging markets—Argentina.
MSU Energy’s benchmark notes, among the junkiest of junk credits, have returned 17% this year, 20 times the average for corporate securities from developing nations. Even after the rally that began when the bonds touched 35 cents in May 2020, they still yield a whopping 14%, a standout in a world where the typical rate for sub-investment-grade debt is near 3.9%.
Of course, those sorts of potential payouts don’t come without substantial risk, and the Buenos Aires-based electricity generator has plenty of that. Not only does MSU operate in a country that creditors have called “a virtual wasteland” after a string of sovereign defaults, its only customer is a leftist government broadly considered by investors to be an unreliable partner. The threat is that at some point a cash-strapped Argentina will blow up the lucrative, dollar-linked contacts that have made MSU such a sweetheart among international bondbuyers.
But Pablo Ferrero, MSU Energy’s executive director, is adamant that the government has never given any indication the agreements—most of which run through 2027 and 2035—are under threat. With three new state-of-the-art thermal plants operating at full capacity since November and a management team focused on paying down debt, the outlook is downright rosy, he says.
“Changing the contracts would affect a lot of institutional foreign investors, which is quite complicated for a country that’s faced claims in foreign courts,” Ferrero said in an interview at the company’s gas fired General Rojo power plant 200 kilometers (125 miles) northwest of Buenos Aires. “It would be pushing a very sensitive button.”
Investors seem to think so too, and the company’s financials are improving. MSU’s earnings before some items surged 80% in the first half of the year, according to Chief Financial Officer Hernan Walker.
“We’re beginning the deleveraging cycle,” Walker said. “It’s what investors like: being able to have visibility and predictability in cash flows.”
Lucky Break
Predictability isn’t a word used often in Argentine financial circles, where investors have been burned by three sovereign debt defaults this century alone, not to mention capital controls that restrict access to dollars, inflation running at about 50% a year and a shrinking economy.
But MSU has had an incredible run of defying the gloom. MSU Energy got its start in 2013 when the company’s namesake, Manuel Santos de Uribelarrea, expanded the family business from farming soy in Argentina’s Pampas into power generation. In 2016, it won a contract from former President Mauricio Macri’s administration to build three gas-fired plants to bolster the power grid, and then won another tender the next year to upgrade those sites.
The first contract, which accounts for about 81% of MSU’s revenue, pays the company just for keeping its plants online as a backstop for periods of high demand. The remaining revenue comes from the second contract as a variable payment adjusted for the plants’ output.
The company sold bonds to refinance its early commercial debt and fund its upgrades in January 2018, just months before Argentine corporate borrowing costs surged in the wake of growing pessimism about the economic outlook. MSU then scored a lucky break by refinancing its debt in May 2020, months before the government tightened capital controls and barred companies from accessing dollars needed to pay debt unless they had already pushed back over half their upcoming payments, which MSU had just done.