AySA's bond rally faces key privatisation test

Debt holders of state-owned water and sewage company Aguas y Saneamientos Argentinos (AySA) are reaping a windfall after President Javier Milei scrapped some price controls for public utility services, sparking a sharp recovery for a business that’s struggled under heavy regulation.

AySA’s dollar-denominated bonds due in 2026 have jumped more than 20 cents since Milei took office in December 2023 and now trade close to par, according to data compiled by Bloomberg. The bonds have handed investors a total return of around 56 percent, compared with an average return of some 11 percent for emerging-market corporate peers over the same period.

A libertarian who wants to shrink the government and deregulate to flip the switch on Argentina’s crisis-prone economy, Milei has pushed reforms that would ultimately allow the privatisation of several state-controlled firms. AySA’s restructuring efforts, coupled with its newfound ability to charge consumers higher fees — the average household’s water bill in Buenos Aires soared 344 percent since Milei took office — have resulted in fully funded operations for the first time since 2007.

“The transparency of the company, and its cost efficiency has changed quite dramatically since Milei came to office,” said Fernando Pueyrredón, a corporate credit strategist at BancTrust & Co.

Milei’s belt-tightening campaign sparked a bout of optimism among investors and fuelled a surge in bonds — both sovereign and corporate — from the Latin American nation. His plans include a push to privatise companies including AySA, which has added to the gains.

The utility, which has already tapped the World Bank Group’s International Finance Corporation to advise them on the potential sale, is in the midst of a massive restructuring. After swapping out its leadership in April 2024, AySA reduced headcount by 20 percent, sold off part of a vehicle fleet and reduced the hours worked by security, cleaning and maintenance staff. Earnings before some items were US$59 million in the third quarter of 2024 — compared with a loss of US$42 million during the same period a year earlier.

Following sharp price increases, the average household’s water bill in the capital of Buenos Aires soared to US$27.76 at the official exchange rate, according to research institute Instituto Interdisciplinario de Economía Politica. That’s given the company enough leeway to cover 100 percent of operating costs with fees it charges its consumers, up from 52 percent last year, according to a press release.

Two paths

AySA could choose a public listing or a sale of the government’s stake in an auction, according to a company official, who asked not to be named because the discussions are private. Argentine officials could sell 51 percent of its shares to a single operator and another 39 percent to equity investors via an initial public offering, the official said, adding that executives have yet to decide which path they want to pursue.

AySA has to win approval from the country’s securities regulator and ultimately, from Milei and his team. The federal government owns 90 percent of the company, while employees hold the remaining 10 percent.

A spokesperson pointed to the company’s efforts to balance its costs and said the move now is to advance the privatisation, adding that the state “must remove itself from all activities that can be better managed by the private sector.”

To be sure, Milei’s strategy to sell state enterprises so far has struggled to take off. Air carrier Aerolíneas Argentinas still faces a congressional vote after authorities declared the airline subject to privatisation. A judge also blocked Milei’s plan to take the country’s largest bank private, and the sale of oil-driller YPF SA is on hold, too.

Future gains for AySA’s bonds now depend on how the company advances its privatisation efforts, BancTrust’s Pueyrredon said.

“Under Milei’s government, the company will be efficient, but I don’t know if the next government will be Milei,” he said. “For it to be a longstanding company, it needs to be privatised.”