Monday, 23 July 2018

Remembering Mexican bonds past

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With Wednesday’s 100-year sterling deal, Anthony Peters recounts a 1980s tale of high and low finance.

Anthony Peters columnist format

Anthony Peters

SwissInvest strategist

It is highly unusual for me to write twice in a day but I could not resist following the announcement of the 100-year pound sterling bond for United Mexican States this morning. It triggered a memory and an unusual phone call.

So there we are, a bond with an order book in excess of £2bn with a maturity date a full century away. Not that it is the first 100 year bond – in fact Mexico has an outstanding century bond in dollars, the 5¾% October 2110 which is trading at or about a 6% yield. Why they should be able to issue in the sterling market at what is at this moment in time indicated at 5¾% area (+/- ⅛%) is beyond me but then I don’t have to buy it, do I?

Anyhow, I saw it flash up on the screens this morning and for some strange reason my mind was cast back to 1985 – nearly 30 years ago – when I received a phone call at my desk with Barclays Bank International Limited, the old BBI, in Zurich from a German count.

The count, let’s call him George, was working for Bayerische Vereinsbank, one of the two Munich-based lenders, the other being Bayerische Hypotheken & Wechselbank, which were merged into HypoVereinsbank, now part of Unicredito, in 1998. “BV” as it was known was a wonderfully arcane institution packed with princes, counts and knights who still carried their pre-republican titles and who were always hired and then treated with special respect whether they had a clue what they were doing or not. Most of them didn’t. But my count did.

He was a senior operative in the trade finance division and was faced with the conundrum of financing an export of sub-machine guns to Mexico. The guns were on order from Heckler & Koch, still today a leading name in sharp instruments. The order had been placed by the Mexican para-military police and H&K, once again on the brink of bankruptcy, needed the deal in order to survive. I think it might have been declared insolvent once or twice since.

The count’s problem was two-fold. The first was the difficulty in obtaining trade finance for things that shoot and the other was, bear with me, that it was impossible to find finance through conventional channels, even trade finance, for Mexico in maturities exceeding three to six months. The less visible areas of financing such as the forfaiting market might go up to two years but that was it and one was looking at rates now associated with pay-day lenders.

We looked at all kinds of solutions, one of which included selling the machine tools to the Mexican police – that idea avoided the export of arms – then sending the skilled German workers on a stint to Mexico to make the guns and after delivery selling the lathes and whatnot back to H&K. Mexico was as good as the Wild West.

Having remembered the episode, I googled the count to whom I have heard nothing since and found him with a small trade finance consultancy in Munich. I picked up the phone, called and we spoke for the first time in nearly 30 years. How did we laugh about the events at the time – we both have quite vivid memories of the situation – but not as much as we laughed at how the world has changed.

A one hundred-year unsecured bond; who would ever have thought of that?

A few years later, around 1988, I was involved in bidding for a piece of Mexican sterling paper, the Mexico 16½% 2008 (issued 1981) which had an embedded annual put. In those days it was hard to find anyone who would consider a bid priced to anything beyond the nearest put but the price differential between the put and the maturity was huge, as nobody knew how to price options in those days. To my knowledge, the paper never traded – a good decision by the holder not to sell.

Meanwhile, we have been into and out of more EM market crises than I have had hot dinners and I’m sure there are a few ahead, even with Mexico involved. Plus ça change, plus c’est la même chose.

I might not feel too excited about buying 100-year Mexican risk at less than 250bp over the 55-year UK Gilt even though it might end up with shorter duration but I do have to thank all involved for helping me go out and find my count. We’re planning to have dinner next time he is in London to see his daughter.

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