Colombia turns to Swiss francs to restructure crippling debt

Colombia's franc loan move is 'unprecedented' Keystone / Gaetan Bally

Colombia is seeking to borrow as much as $10 billion in Swiss francs to fund the repurchase of more expensive liabilities in a bid to rein in the nation’s burgeoning debt service costs.

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The government is in talks with at least eight major international banks to secure financing to buy back bonds denominated in Colombian pesos and US dollars, public credit director Javier Cuellar said. The loans would have a low interest rate but increase the impact of exchange rate fluctuations. 

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“I’m taking a big risk, possibly the biggest risk any public credit director has taken,” Cuellar said in an interview this week. “This operation is unprecedented.”

The radical new debt management strategy comes after the administration of President Gustavo Petro suspended the nation’s fiscal rule for the next three years as it tries to avoid painful spending cuts. The announcement was swiftly followed by downgrades by both Moody’s Ratings and S&P Global Ratings last month. 

“There are significant rollover risks because the operations are short-term and involve significant interest rate and exchange rate risks,” said Andres Pardo, chief Latin America strategist at XP Investments.

Currently, Colombia’s external borrowing is overwhelmingly in US dollars, but the treasury plans to issue euro-denominated bonds to create a curve in that currency as well, Cuellar said. 

Sovereign bonds rose across the curve Thursday, with notes maturing in 2061 jumping 1.7 cents to trade around 54.9 cents on the dollar, according to indicative pricing compiled by Bloomberg. 

Cutting Costs

“This trade is more a diversification of external financing sources than a speculative trade,” Cuellar said, referring to the loans, the buyback and the euro debt sale.

The aim is to reduce the country’s interest debt payments to 4.5% of its gross domestic product from 4.7%, helping to alleviate investor concerns that have punished local bonds this year, he added.

Most of the disbursements are expected by the end of July, he said. The loans, initially for one year, could be rolled over for two additional years.

Cuellar declined to say what proportion of the funds will be used to buy back local peso bonds versus dollar debt. Many issues in both pesos and dollars are highly discounted at the moment, he said. 

The peso strengthened to a one-year high in early trading on Thursday. If the government were to convert a large amount of francs into pesos that could potentially strengthen the Colombian currency still further. 

In the dollar curve, the treasury has identified seven or eight bonds that are trading for less than 70 cents on the dollar, “and that suits us,” Cuellar said. 

Quiet holiday period

The government has already initiated its operation to buy back discounted bonds but has so far purchased less than 10% of its target amount, Cuellar said.

The Finance Ministry announced in mid-June the loan plan would be worth 20 trillion pesos ($5 billion) and financed with a basket of currencies. Since then, Cuellar said they have settled on the Swiss franc and raised the ceiling to as much as $10 billion.

“It’s highly likely that the 20 trillion pesos number will be bigger,” Cuellar said. “It could be 30 or even 40 trillion because the banks are giving me that figure.”

Colombia also plans to tap international markets once this year and twice in 2026, aiming to raise approximately €5 billion. Despite investors showing appetite for emerging market debt, the quiet summer holiday period in Europe is an obstacle to offering the securities at the moment.

“If what we have in July is the same as what we have in September, I think September could be a good alternative,” Cuellar said. “But we have to evaluate the window.”

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