Sunday, 18 August 2019

Latin America Bond: Fibra Uno’s US$1bn dual-tranche bond

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Fibra Uno’s US$1bn dual-tranche offering opened yet another funding door for Mexican real estate investment trusts in 2014, marking a number of firsts for the evolving asset class and for the region as a whole.

Not only was the bond the first ever from a Latin American REIT (or Fibra as they are known in Mexico), but it included a 30-year tranche – a rare event for an inaugural issuer.

“It opened the gates for a new asset class,” said Carlos Philips, executive director, Latin American debt capital markets at BBVA, which helped manage the trade along with Credit Suisse and Deutsche Bank. “It is not going to be the last one.”

Mexico’s market for REITs came into its own in 2014 as a string of issuers sold stock, but Fibra Uno (Baa2/BBB) led the way with both equity and bond offerings that appealed to international accounts keen to play the country’s growth story.

Extensive investor education and price discovery were necessities, given the rarity of this type of issuer and the unusual length of the tenor.

A four day, two-team global roadshow, involving meetings with 85 investors, gave management and leads the chance to explain Fibra Uno’s story to buyside accounts unfamiliar with the covenant structure and the leverage restrictions required for REIT bonds.

“It took a lot of education,” said Carlos Mendoza, co-head of Latin America capital markets at Deutsche Bank. “EM investors don’t necessarily know how REITs work, their covenants and how they are different.”

Amid positive investor feedback, leads tested the waters with a 10-year with initial price thoughts of 275bp, providing a decent premium to both similarly rated US REITs and Mexican corporates, generating a book close to US$3bn by midday.

This provided the confidence to take a crack at a rare long bond despite the borrower’s inaugural status.

“The backdrop was a still historically low interest rate environment, and investors were looking for duration to pick up yield,” said Edgar Madinaveitia, director, debt capital markets at Credit Suisse. “We thought it was the right combination of factors to issue a 30-year tranche.”

In the end, the borrower printed a US$400m 30-year tranche at 97.087 with a coupon of 5.25% to yield 7.188%, or a spread of 350bp over Treasuries – exactly where it had guided.

Its US$600m long 10-year was priced at 99.752 with a coupon of 7.95% to yield 7.188%, or a spread of plus 250bp, after tightening from price guidance of 250bp–262.2bp and initial price thoughts of 275bp area.

The 10s to 30s spread differential did come at the wide end. But it was seen as a price worth paying at a time when long-term rates were at historic lows.

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