South-South trades are still rare in the bond markets and are mostly undertaken by development banks like CAF issuing in markets such as Hong Kong.
So a US$750m 30-year bond by Mexican utility Comision Federal de Electricidad in June was a landmark transaction. It was the first Formosa issuance by a Latin American corporate and the first by any Mexican borrower as the state-owned company sought to diversify its investor base.
CFE (BBB+/BBB+) was also the first issuer in the Formosa market to take advantage of a relaxation of capital requirements for Taiwanese life insurers to invest in Triple B plus credits.
CFE first met investors in mid-May during a two-day non-deal roadshow in Taipei. Some accounts, however, were already familiar with the name given they had participated in the company’s previous 144A/Reg S US dollar offerings.
CFE announced a 30-year non-call life amortising note issue with a target amount of US$500m. The structure meant the average life of the bonds was 15.5 years, a tenor that’s difficult to achieve in the conventional US dollar market.
Demand was such that CFE was able to increase the size by US$250m to US$750m, the maximum the company had approval to raise. The bonds were priced at a yield of 5.15%, in line with its conventional US dollar curve, where the 4.75% 2027s and 6.125% 2045s were trading at around 4.35% and 5.50%, respectively, according to Thomson Reuters data.
“The costs are comparable to the dollar market,” said CFO Jorge Mendoza Sanchez at the time of the deal. “However, the Formosa market offered greater flexibility in terms of format and tenor.”
“You really hit a different investor base at a good level,” said Jean-Marc Mercier, global co-head of debt capital markets at HSBC, which was sole lead manager and underwriter. “It is smart.”
A growing pool of Asian investors is making the region an increasingly attractive option for names like the state-owned utility as they seek to diversify their funding bases.
Late last year, CFE also raised US$375m through a 20-year amortiser privately placed among Asian accounts and priced with a 5% coupon.
Bankers say the deal should encourage others to access the Formosa market. “It will be a benchmark for other Mexican and Latin American issuers,” said Michael Cummings, head of Latin America debt capital markets at Credit Suisse, which acted as structuring agent alongside Morgan Stanley.
Proceeds from CFE’s deal are going to finance power and electricity projects known as PIDIREGAS, which typically use amortisers to better match revenues and costs during the lifetime of the projects, said Sanchez.