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Monday, 23 October 2017

Leading the way

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Mexico is one of the most highly rated sovereigns in Latin America with a number of notable transactions demonstrating investors’ enthusiasm for its paper. Their only complaint might be that its recent successes mean it may be a quiet end to the year. Jason Mitchell reports.

To view the digital version of this report, please click here.

On 6 April, the United Mexican States received such a favourable reaction from investors to a re-opening of its 2040s that it decided to raise US$1.01bn instead of the US$500m it had initially targeted. The issue was heavily over-subscribed and the book reached US$4.8bn, pricing at 101.358 to yield 5.95% or 134.6bp more than US Treasuries with a similar maturity.

“There are two main reasons why the April deal was able to achieve such a favourable yield,” said Max Volkov, managing director of Latin America debt capital markets at Bank of America Merrill Lynch. “Firstly, the sheer size of the order book; and secondly the fact that UMS is a frequent borrower and is well connected with a large number of high grade investors.”

He pointed to the shortage of bonds from high-quality sovereign investment grade names. “[Mexico] is seen as a very safe investment. It took advantage of favourable market conditions to issue a 100-year bond in September and to issue the 2040s in April with a sub 6 per cent yield,” he said.

In July 2010 it had issued in euros after a five year hiatus, the first LatAm sovereign to do so since 2006, raising €850m in a seven year issue. The deal offered invaluable diversification, though it paid for the privilege, pricing at 99.757 with a 4.25% coupon to yield 4.291% or mid-swaps plus 180bp, anywhere between 40bp–85bp back to the US dollar curve when swapped back into dollars.

October brought a couple of significant trades. First it brought the region’s first sovereign century issue, also becoming the only issuer to sell a century bond with a US$1bn size, achieving a 6.10% yield and 5.75% coupon. Then it tapped the yen market, bringing its second ¥150bn 10-year deal in less than a year, which priced at 30bp inside the previous December’s bond of similar size and duration.

In February it came with a US$1bn retap of its 5.125% 2020s, pricing at 102.01 to yield 4.844% or 123bp over.

The country has had investment grade since March 2000 and is currently rated BBB with a stable outlook by Standard & Poor’s. “Mexico was moved to investment grade at a much earlier date than Brazil,” said Lisa Schineller, a director in the sovereign ratings group at S&P. “It has a longer track record of stability and put in place policies to improve the country’s fundamentals earlier than Brazil. It also has lower debt levels and lower external imbalances.” However, its tax base is 10% of GDP, compared with Brazil’s 35%.

One sign of the appetite for Mexican bonds is that investors tend to hang onto them, with little active trading. Its 2040s issuance attracted more than 200 investors - 72% came from the US, 18% from Europe and 10% from Latin America, according to BofA Merrill, with asset managers taking 60%, hedge funds 18% and pension funds 15%.

Investors in the April issue have been well rewarded. Because of the decline in the underlying US Treasuries rates, the Mexico 2040s are now trading at 5.625%, up 4.65 points above the re-opening price.

Mexico has been the most active sovereign borrower in Latin America since the start of 2009, having raised a total US$10.65bn, against US$9.98bn by Venezuela, US$4.73bn by Brazil and US$4.32bn by Colombia, according to ThomsonReuters data.

Mexico has achieved the best spreads among recent 30-year new issues from Latin America: on May 25 Pemex placed US$1.25bn 6.5% notes due June 2041 with a spread of US Treasuries plus 228. On March 31 Votorantim, the Brazilian cement, concrete and aggregates producer, issued US$750m 7.25% notes due April 2041 with a new issue spread of Treasuries plus 278.1 to yield 7.3%. On 25 January, El Salvador placed US$654m 7.625% notes due February 2041 with a new issue spread of Treasuries plus 313.1.

Its success could spell a quiet end to the year. “Mexico’s financing programme for this year seems to be close to being complete, so we are likely to see only more modest deals coming out of the country for the rest of the year,” said Volkov. “However, there is a great deal of demand for UMS paper and the window is absolutely open for it if it does decide to return to the market.” Euro and yen bond issues are possibilities for later in the year.

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