IFR Mexico Roundtable 2017: Part 1

IFR: Welcome to IFR’s Mexico Capital Markets Roundtable, which we are holding this year less than a month after Donald Trump’s surprise victory in the US presidential election on November 8. The initial reaction to the prospects of a Trump presidency has been particularly negative for Mexico, with the peso taking its biggest hit since the 1994 ‘tequila crisis’ and bond spreads also widening considerably. How will this impact corporate Mexico and the sovereign’s credit standing going into next year?

Fabiola Ortiz, S&P Global Ratings: We are waiting for the president-elect to form his cabinet and to execute his policies. What we are seeing in general is a lot of uncertainty in the markets, and that is because he has talked about taking action on the North American Free Trade Agreement (NAFTA). And that will obviously create some uncertainty regarding the exchange rate, which has affected some corporates.

In general it is too soon to provide an assessment and take ratings actions on the sovereign or corporate sector. So we will wait and see.

Juan Claudio Fullaondo, HSBC: When will S&P be ready to make an assessment on the country’s rating?

Fabiola Ortiz, S&P: Probably about 100 days after (Trump takes office). We will then review the sovereign and the corporate sector, once he takes action and forms a cabinet. I would say the first or second quarter of next year.

IFR: How has this new uncertain backdrop impacted funding strategies, needs and costs for those issuers around the table?

Gerardo Vargas, Fibra Uno (FUNO): We have a relatively light funding schedule for next year, but I would say that our funding costs have increased if we were to issue in pesos. Just looking at the base rate, it is 100bp higher than a few days before the US election.

The same thing has happened if you look at the secondary market in US dollar bonds. We have very light maturities next year – only Ps400m – so we are very comfortable. We have in place a committed credit facility that vastly exceeds any needs we would face next year.

So we will probably at some point in 2017 look at the local market, as we would rather have more funding in pesos than US dollars in this environment. We have usually been somewhat indifferent in terms of which currency we issue in, but hedging has become considerably more expensive.

IFR: What are your funding needs next year?

Gerardo Vargas, FUNO: About Ps8bn (US$386m), but if we don’t carry out some planned acquisitions, we will have much lighter needs, to the tune of around Ps2bn.

IFR: America Movil has been a frequent issuer in the past. What are its funding needs for the year ahead?

Carlos Garcia Moreno, America Movil: We are in the process of deleveraging, and we expect to reduce debt next year. We only have US$2bn-equivalent in amortisations coming due next year, and we expect to pay that off with cash flow. That doesn’t include debt from Telekom Austria. They have a €500m bond coming due in January, and they will refinance it.

IFR: What about Comision Federal de Electricidad (CFE), the state-controlled utility. I know you tapped the market in October with a US$1bn 10-year bond that was priced to yield 4.766% on the back of a US$5.6bn order book. Are you done for the year and what do you need to raise for 2017?

Jorge Mendoza Sanchez, CFE: We are done for 2016. We successfully issued a dollar trade in October with the lowest yield we have accessed in the history of our company. It was a 10-year dollar bond.

For 2017, we have a debt ceiling of Ps10bn, which was approved by congress and proposed in the economic package. This is for working capital purposes. We do have other debt issuance in the form of Pidiregas. These are similar to project finance (debt), but they are off balance sheet in terms of the budget that is approved by congress.

There we are still going over all the projects that we want to finance in 2017. I wouldn’t like to say a specific number, but it will be somewhere between US$2bn and US$4bn, depending on how many projects are inaugurated in 2017.

We are looking at different financing instruments, including Fibra Es – which is similar to a Master Limited Partnership (MLP) – in particular for some transmission assets, so hopefully with this we can meet some of our financing needs in 2017.

IFR: Which international markets are more cost effective these days, given the disparity in monetary policies in the US and Europe, for example?

Jorge Mendoza Sanchez, CFE: For issuers that have complete flexibility in regards to the currencies they can issue in, the European market is becoming attractive. But for CFE in particular, given the nature of our business and the nature of our sales, our first line of financing is always in pesos.

If we don’t see attractive conditions, we usually see the dollar market as a second line of defense. And that is what we have done in the last year. We have seen a little bit less capacity from the local pension funds (Afores) to purchase our paper, and that has basically pushed us to look at different markets.

That doesn’t mean we are not going to look at (other currencies), but in terms of CFE in particular, we are going to try to focus on the peso and the dollar market going forward.

IFR: Has that currency mix changed over the years?

Jorge Mendoza Sanchez, CFE: That has been the case (for a while), especially for the Pidiregas projects, given that we try to structure them around the life of the project and we use the proceeds to pay for the project, like project finance.

We have been looking recently at the dollar market, because it has given us the flexibility to structure financing according to our needs. We have also done a lot through private placements. HSBC recently participated in one that was seen as very successful.

IFR: So are you looking at the private placement market more?

Jorge Mendoza Sanchez, CFE: For project finance and the Pidiregas, yes. That is the first area we are looking at. We will also look at the public market if it shows some flexibility in terms of the structure.

IFR: When you look at the dollar market, how does CFE see itself pricing to the sovereign and state-owned oil company Pemex, which in 2016 was under some pressure due to lower oil prices?

Jorge Mendoza Sanchez, CFE: We have always tried to show that CFE is a more natural utility company. Having said that, we have always been seen as a quasi-sovereign by investors.

So we are always somewhere between the Mexican sovereign and Pemex, which is the largest quasi-sovereign in the country. But as you know, Pemex has been impacted by lower oil prices – and that has translated into a higher spread against the sovereign. We are usually between those two, but what we have seen is that there is a lot of appetite for CFE in particular, and that has allowed us to tap into the market.

We had more than US$5bn in demand in our last dollar transaction, and that allowed us to wrap up our financing needs for 2016.

Fabiola Ortiz, S&P: Because of lower oil prices earlier in the year, Pemex’s spread to the sovereign was about 300bp. The market looked at Pemex as an oil company rather than a quasi-sovereign. But nowadays, given that oil prices have rebounded, it is about 100bp to the sovereign.

IFR: So where does CFE trade to Pemex now?

Jorge Mendoza Sanchez, CFE: Post the US election, CFE spreads widened about 100bp, while Pemex’s widened about 150bp. So there has been a little less volatility for CFE. There is 60bp between Pemex and CFE in the dollar market.

IFR: I understand that CFE’s last dollar bond deal in October saw particularly strong interest from Asian investors. It was a similar story for the Mexico City Airport’s Green bond in September. Is that a pocket of demand that Mexican borrowers will be able to tap going forward?

Juan Claudio Fullaondo, HSBC: Asian liquidity has been increasing. This year Asian investors have been showing an interest not only in Mexican credits, but also more broadly in Latin America as well.

For example in the United Mexican States’ recent issue, Asian investors were very active participants. In the bookbuilding process for the Mexico City Airport’s Green bond, we in fact started in Asia. And then we continued in Europe. And by the time New York opened, the book was already 100% completed, because of the huge participation from Asian and European investors.

Also, in regards to CFE, just a single account put a US$500m order for CFE on a private placement. It was a 20-year legal final. There is huge appetite from the insurance companies in Taiwan as well.

IFR: I appreciate America Movil is deleveraging at the moment, but would the company look to Asia for an opportunistic tap perhaps?

Carlos Garcia Moreno, America Movil: We have a Samurai program in Japan, which we renewed, and we have seen interest. We have also done issues in yuan. It is a good region to go to for funding. You can get fairly good conditions, and as I said we have continued to receive interest.

We know that a lot of our dollar bonds are being acquired by Asian investors (in the secondary markets). In the absence of new issues, they are investing in some of our bonds. That is a good indication if you want to go to market at some point.

IFR: Has Asian demand been impacted at all by the uncertainty in the US?

Juan Claudio Fullaondo, HSBC: Overall European and Asian investors have proven very resilient. Obviously it is too early to say, but I think they are looking for yield as well. Those accounts would certainly be very interested in looking at companies with credit profiles such as the ones around this table.

IFR: What about the Formosa market in Taiwan? Some big name US borrowers have successfully tapped that market in dollars at attractive levels.

Juan Claudio Fullaondo, HSBC: Insurance companies in Taiwan are also looking for yield. They would be very interested in Mexican names such as CFE.

IFR: I would like to delve a little more deeply into how the Trump victory in the US has impacted funding strategies. How are Mexican CFOs adjusting their thinking, particularly in the wake of so much volatility in the Mexican peso?

Gerardo Vargas, FUNO: In terms of the overall business strategy of the company, it has not impacted our plans. We are expecting a slower growth for 2017. However we still think we should go ahead and carry out our growth plans.

We have just announced acquisitions, which at the new exchange rate are worth US$1.5bn. Some of this will be financed with equity. Another portion will be funded with cash, which is what will drive us to access the debt markets.

What has changed a little bit is that now we are looking more closely at our FX exposure.

If you ignore the exchange-rate risks of our tenants, Fibra Uno is long dollars. We are receiving a little bit less than US$2 of revenues for every dollar of interest expense. Interest expense is basically all of our dollar expenses.

However we have become more concerned about the FX positions of our tenants, because in the Mexican office space, which generates approximately 50 cents of every dollar of revenue we receive, we are not sure all the companies are generating dollars – certainly not.

So we are now monitoring this situation very closely. We created a policy where, when we compare dollar revenues to dollar expenses, we want that relationship to be 1.5 or higher. If we were to issue in US dollars, we would most likely hedge that exposure back to pesos.

IFR: How do you hedge your exposure?

Gerardo Vargas, FUNO: Cross-currency swaps

IFR: Is that expensive?

Gerardo Vargas, FUNO: Well, a few months back the basis swap was trading around the mid-90bp, and it came as low as 65bp. That is an additional 30-odd basis points of cost. It has since the US election come back a bit, but it is still near the lows.

IFR: So from that perspective, dollar financing doesn’t look as attractive?

Gerardo Vargas, FUNO: The reason we go to the dollar market is because the Mexican market is fairly small. We need to access a different investor base. Mexican pension funds (Afores) have set (limits) on the amounts of equity and debt they will buy from a single issuer, and in our case that has become a limitation.

IFR: What sort of exposure does CFE have to FX volatility and how have you attended to such risks?

Jorge Mendoza Sanchez, CFE: We have two types of exposure to currency volatility. The first one is related to financial debt. Currently around 31% of our debt has an exposure to the dollar market. This has been the target we have tried to maintain in recent years. So we have been active in the hedging market to also reduce our exposure down to 30%.

We have also been active doing cross-currency swaps, and we have also done short-term forwards. In addition to overall costs, the good thing is that we have been able to find liquidity (in the swap market).

We have been very successful using a new format called swap syndication, where you hire one bank. They do their transaction slowly in the market, and once they close the terms and conditions of your swap, you assign that exposure to a few other banks, instead of having four banks tapping the market at the same time and making more noise.