IFR Mexico Roundtable 2016: Part 1
IFR: Welcome to IFR’s Mexico Capital Markets Roundtable. This has been a tough year for emerging markets and, in particular, Latin America. A precipitous decline in commodity prices, corruption scandals in Brazil, weaker local currencies, slower growth in China and the prospects of the first rate hike in the US for nearly a decade have all combined to create a perfect storm for the region.
Against that backdrop, cross-border bond volumes have dropped dramatically. And while Mexico has been seen as one of the brighter spots in the EM universe, it has not been immune to the broader buyside push-back and diminishing growth prospects in emerging markets. How has this impacted financing strategies for a company like America Movil, which has typically been a frequent issuer in the capital markets?
Carlos Garcia Moreno, America Movil: One of the things we have always been more preoccupied with is refinancing risk. We think it is one of the most underestimated risks among companies — and sometimes among governments.
We have a very smooth amortization profile. The average life of our debt is around 10 years. That means the amounts we need to pre-finance each year are very limited, even limited to the cash generation of the company. So there is always the possibility to pay down debt at any given moment. And that is one of the things that has allowed us to maintain very good credit ratings. We actually didn’t come to the bond market in 2015. That is the first time in seven years that we really didn’t need to come to market.
The first thing you recognize when dealing with markets is that they sometimes shut down. That is a fact and you have to prepare for that. In our case, we have backup lines of credit to mitigate such risks, and this is something increasingly that other corporates are doing. Having a backup liquidity facility enables us to withstand such moments.
[Issuers are also putting] value in diversifying their funding sources. Not all markets close at the same time, so even if one shuts down, you will have other ones open. It is often the case that issuers need to develop those funding sources — and that is not something that all corporates can do, because they don’t have the scale. But if you do, it has to be an important part of your funding strategy.
IFR: How much does America Movil need to raise in 2016 and which markets do you intend to tap?
Garcia Moreno, America Movil: If you add everything up, it is probably close to US$4bn-$5bn dollar-equivalent in refinancing. But that includes Telekom Austria, which we consolidated. They have their own cash and their own debt, so if you take that out, you are talking about US$4bn or thereabouts, maybe less. An important part of that will come from the local markets, but more likely we will tap different markets, not just one.
IFR: How have this year’s volatile market conditions changed funding strategies at Mexico’s Ministry of Finance?
Alejandro Diaz de Leon, Ministry of Finance: The expected plot has changed significantly over the last few years, and we have started to see some risk factors that were not present a year ago. First we had the quantitative easing from the eurozone, which started the strong appreciation of the dollar against the euro, and that started more foreign exchange volatility around the other currencies.
That, together with the end of Saudi Arabia’s strategy around oil supply and slower Chinese growth, affected commodity prices. These dynamics have changed the market tone, the willingness of investors to commit resources and how they perceive the emerging markets as an asset class.
This has created a challenge for issuers [and impacted funding strategies]. For example, we tried to front-load our external funding needs for the year and we literally ended the first four months of 2015 with all our financing needs met.
That was done in the dollar and euro markets, including a 100-year transaction in euros that took advantage of a window created by the European Central Bank’s QE program. In the last few months, volatility has got stronger and you have to pick and choose which windows to execute potential transactions. Going forward it is likely we will continue to see this differentiation between the dollar and euro yield curves.
[Under these circumstances] we have tried to diversify our funding base as much as possible. We have gone to different markets so that we are not affected by the dynamics in one particular market. That was the case with the ‘taper tantrum’ in 2013, when we went to the yen market. And right now we are again evaluating another potential transaction in yen.
The risk that everyone thought would be the first thing to trigger everything off — US rate hikes — has not even started. Once the Fed makes that decision, and if the market absorbs the news, some of the risks may abate.
IFR: What impact will the start of US monetary tightening have on the cost of funding for Mexican issuers, and what does it mean for the timing of issuance in 2016?
Martin Werner, Goldman Sachs: We have a few clients now looking at the market. If they are a well-known, investment-grade client, they can still get very attractive costs [of funding], and they should go now. You don’t really know how the market will react to the first Fed move.
If you need the resources either for refinancing or capex, today you can get all-in costs that are very attractive, especially in the shorter tenors. People will look back in five to seven years at the cost of debt being raised these days, and they will say I should have raised even more money. Historically, today’s rates are very, very low. If we get back to a decent growth rate in the future, rates will be much higher.
Juan Claudio Fullaondo, HSBC: This year has been a very challenging year. Since 2009, it has been a constant trend that emerging market flows were growing. This was the first year since then that we saw outflows from EM.
Overall, however, I think Mexico is viewed differently from other countries in the region, because it is not commodity-driven, and issuers have good opportunities to tap the market. As Alejandro was saying, the euro is a great currency to issue in right now.
During these last two weeks of the year, you have seen some compression in new issue premiums. Instead of the 30bp to 35bp you were seeing for high-grade companies, you are seeing five to 10bp. So I think now is a very good opportunity to tap. There are a lot of companies in blackout periods and we believe there is a lot of money on the sidelines, so there will be opportunities to issue in December and the first quarter.
In general, the issuers that came in the first semester of 2015 really got lucky, because after that the markets shut down.
Carlos Caraveo, Pemex: We are looking at the yen market as well. It is difficult, because Pemex as a credit is not that easy to understand. So we are looking for a guarantee either from JBIC or NEXI. Not all markets were shut, so in 2015 we returned to the euro market for the first time in two years. The coupon we got there is good, but we have to hedge it into dollars as our company is basically dollarized.
Talking about the environment, the Petrobras situation — as well as the price of oil — have had an impact on the way investors view us. We got into the market very early in 2015, with a US$6bn transaction at the beginning of the year and then US$2bn equivalent in the euro market. But we still have to tap the Mexican market, which has been challenging as well.
IFR: Pemex still has large financing needs. Can you talk about your funding strategies going into 2016 and what other markets you are considering against the backdrop of tighter monetary policy in the US?
Caraveo, Pemex: Like America Movil, we have about US$6bn in bilateral or syndicate loans to help us mitigate this volatility. For this year we are almost done. We are looking to tap the Mexican market as well and other opportunities such as a sukuk transaction. But a sukuk is complicated, as you can’t pay interest and you have to put together several assets on a financial lease and move some of the contracts we have with suppliers.
We took a look at the Green bond market, but that was also very difficult. Instead we are considering markets that have enough liquidity and tenors long enough to match our assets with liabilities, which is around 10 years. We like those kind of deep markets.
Fabiola Ortiz, Standard & Poor’s: The market is still open for investment-grade credits like Pemex and America Movil. Opsimex, America Movil’s cell tower spinoff, successfully tapped the market, for example. However, it has been very difficult for speculative-grade companies. Investment-grade companies often have credit lines available when they have difficulties issuing debt. But where we have seen the difference between speculative-grade and investment-grade companies is in their ability to tap the market.
Nathan Moussan, Actinver: Big corporates that have most of their revenues in Mexican pesos have been looking to take advantage of the local debt capital markets. You have better conditions right now for some corporates, not all.
IFR: What has the dramatic decline in the value of the Mexican peso against the dollar meant for the country’s borrowers in terms of credit quality and their appetite for raising funding in hard currency? Are we likely to see any blowups like we did among several Mexican names in 2008, when FX derivative positions backfired following the global financial crisis?
Ortiz, S&P: Ratings haven’t been affected because of FX volatility, as most companies have learned from 2008. They have been very cautious about derivatives and have not been using them in a speculative way. In Mexico, FX volatility has been an issue. But companies in Peru, Argentina or Uruguay have been more affected than those in Mexico.
Garcia Moreno, America Movil: We have operations in 26 countries, and that means we have revenues in 19 different currencies. But it is all based in Mexico. So when there is a movement in the peso versus other currencies, we have to register an FX gain or loss. So it is a little bit of noise around having a centralized funding strategy, which we do have. All the funding basically is raised in Mexico, irrespective of whether it is in euros, dollars or whatever else.
IFR: Does this have an impact on your leverage ratios and the way rating agencies view America Movil?
Garcia Moreno, America Movil: No. One thing is to have a diversified funding strategy, and another one is not to have an active management of your currencies. We do have an active management of the currency position and we do have some hedges, and the funding structure doesn’t really reflect the end currency risk that we are taking.
The hedges end up reducing and mitigating the effect of the debt. That is what the rating agencies look at. They look at the debt, but then they look at the value of your derivative position. It has a market value; it is money you can tap. That is something that goes into the rating. In our case, the ratings are in the single A category by all three rating agencies. They are all stable. And they are the top ratings in the telecom sector, in the Western Hemisphere at least.
Ortiz, S&P: The functional currency is the peso for most Mexico companies, but they try to mitigate risks by tapping both the international and local markets, so they don’t have all their debt in dollars.
Fullaondo, HSBC: Because of the liquidity of the banks in Mexico, it is relatively easy for mid-sized, non investment-grade companies to get local currency funding up to five years. But if you don’t have a local AA+ rating or higher and want to lengthen your maturities, it is hard to tap the local bond market. So the only way these companies get long-term funding is to access international markets, and that is when it gets challenging given the new spread levels (for lower-rated credits). You have to find the window of opportunity and make sure the swap is efficient. That is the only way they can tap long-term funding. That is a reality.
Carlos Albarracin, Milbank: You have two Mexicos now. In the corporate sector, you have the high-grade issuers that continue to look at the market. Then you have the lower-grade issuers: the first-timers that are basically retreating from the international markets and are looking at the local markets or the loan market. You also have the other parallel reality of the energy and infrastructure sector. The time for setting up these structures and creating [vehicles to finance] infrastructure takes much longer than it does in the corporate bond markets.
Garcia Moreno, America Movil: This issue of smaller companies trying to go to market is something that needs to be addressed. There are market opportunities. In the past they did have the ability to work with the credit-enhancement companies.
Moussan, Actinver: In Mexico there isn’t a market for mid-sized companies, and if they want to access the market it can be very difficult. Getting those enhancements is very costly for them, so they often prefer a standalone rating without the enhancement and pay higher spreads. However what we have seen in the past few months is that Afores (pension funds) are investing in lower-rated companies.
Cesar Armando Cortes, CONSAR: Afores can invest in lower-rated companies but there are some conditions. They have to show they can carry out the required credit analysis. We ask them to show us that they have these capabilities. Afores are in the process of building these kinds of teams and working on these models.
Moussan, Actinver: In the past month there has been a scarcity of issuers placing debt in the local markets, so Afores are looking to diversify their portfolios and are looking at lower-rated credits to improve returns.
Fullaondo, HSBC: There have been Afores that have participated in the [local currency] syndicated loan market, and that may be a trend. They are looking at sub-investment-grade credits, and even if these transactions are not public there may be opportunities [for these companies] in the syndicated loan markets.