Clearing the air

IFR Top 250 2014
6 min read

Since Moody’s upgrade in February, Mexico has upped its game and is raising money in the A League.

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The signal to the markets that the Latin American sovereign would be slightly different this year was the upgrade by Moody’s in early February.

“The main driver of the upgrade is the approval of the government’s reform agenda, which the rating agency believes will have important implications for the country’s sovereign credit profile,” Moody’s said, as it rated the sovereign A3.

Although the other two main ratings agencies, Standard & Poor’s and Fitch, still have the Latin American country at BBB+, the upgrade has brought Mexico out of the shadow of Brazil and into the club of countries such as Poland and Malaysia. It looks like it is here to stay.

“Mexico’s credit standing within the A peer group is not expected to change significantly over the next two to three years,” noted Moody’s when revisiting the sovereign at the beginning of March.


What has changed is attitude. Mexico’s borrowing has been much broader and more thought-provoking this year. To-date, it has raised more than US$6bn in the international markets and has pretty much covered its external financing needs for 2014.

“Mexico has been astute in leveraging market opportunities to its benefit,” said Shelly Shetty, senior director and head of Latin American sovereigns at Fitch Ratings in New York.

It was out of the gates in early January with a dual-tranche US$4bn bond issue and liability management transaction split into tenors of seven years and 30 years and sold through Credit Suisse and HSBC. In the end, it printed US$3bn of 5.55% 2045s at Treasuries plus 170bp and US$1bn of 3.5% 2021s at Treasuries plus 120bp. Books on both tranches reached US$3bn and appealed deliberately to a wide range of investors.

The seven-year tranche was aimed at a buyside that wanted shorter duration in a rising rate environment, while the 30-year tranche targeted insurance portfolios.

At the beginning of April, Mexico tapped the euro market with a €2bn two-tranche deal split into new seven-year and 15-year notes through BBVA, BNP Paribas and Deutsche Bank. It sold a €1bn 2.375% seven-year tranche at 99.828 to yield 2.402%, or mid-swaps plus 105bp, and a €1bn 3.625% 15-year tranche at 98.642 to yield 3.745%, or mid-swaps plus 150bp.

The buyers were not that dramatically different to those of the dollar trade. In Europe, the majority of both tranches went to fund managers, while the longer tenor piece was also enthusiastically bought by insurance companies and pension funds.

When compared with the US trades in January, it might appear curious that Mexico would want to pay more than it had done in the dollar market. The seven-year piece came around 5bp wider, but the 15-year tranche was almost 20bp wider. But it has been a canny move for several reasons. First of all, while the pricing was indeed wider than on the US trade, the premium on the 15-year piece was a considerable improvement on the price that Mexico paid on its 10-year bond sale last year.

The euro sale was also noteworthy because it shows the depth of appetite for Mexico in the European market – books for the deal reached €6.5bn – and is a significant marker in diversification.

As Marco Oviedo, Barclays’ chief economist for Mexico, pointed out: “The window was open. A euro deal had not been sold for some time and Mexico had made it clear that it did want to tap the market again to release pressure on the US curve.”

Mexico’s most significant achievement this year, however, has been with the show-stopping £1bn (US$1.7bn) 5.625% 100-year bond offering that it sold in mid-March through Barclays and Goldman Sachs in the slipstream of the Moody’s upgrade. The only countries previously to have sold Century bonds were China and the Philippines in 1996 and 1997 – and they were for much smaller amounts.

“It is our first sterling transaction in almost 10 years and our first in the external markets since Moody’s put us in a Single A category,” said Alejandro Diaz de Leon, the country’s head of public credit, speaking to IFR at the time.

Driven by reverse enquiry and sold to real-money institutional accounts, mostly in the UK, some of which were only now able to invest in the sovereign, it was only Mexico’s third Century bond (the previous two were denominated in US dollars – a US$1bn issue sold in October 2010 that was then tapped for a further US$1bn in August 2011 to yield 5.959%) and its first sterling deal in a decade. With a book that topped £2bn, the March 2114s were priced at 97.834 to yield 5.75%, or 223.2bp over Gilts.

There is no doubt that the deal had an element of chest-beating about it. “A 100-year bond is a way of taking advantage of low interest rates and, of course, the exposure is swapped into dollars,” said Barclays’ Oviedo. “But it is important because it looks good. It is a way of showing off that Mexico has low risk.”

As for the rest of the year, the country is playing its cards pretty closely to its chest. It has let it be known that it intends to raise a further US$2bn, but not which market it might tap.

Some even think a Japanese trade might be on the cards. But whichever route Mexico takes, investor appetite will be there.