Starting with a bang
Mexico’s US$3bn 50-year Formosa bond was a good illustration that the Formosa market is becoming an increasingly important avenue for issuers to diversify their long-term funding.
It wasn’t just the size of the deal that stood out but also the timing. The bond, the first by a Latin American sovereign in the Formosa format, came on January 4, the first active session of the year.
The deal turned received wisdom on its head. Usually, an issuer such as Mexico would be expected to kickstart its annual funding programme with a transaction in the conventional US dollar market.
Political turmoil in the US, following Donald Trump’s refusal to accept the outcome of the presidential election, meant there was some uncertainty about global market risks. Investors were also awaiting the outcome of the Senate runoff elections in Georgia, which were due to take place on January 5.
But Mexico, rated Baa1/BBB/BBB–, had been gearing up for the issue for several weeks beforehand. Events north of its border were not going to stop the funding team, though it recognised the need to move quickly.
“Taiwanese lifers have maximum liquidity at the start of a year and that liquidity gets used up very quickly,” said Ali Hussain, global head of MTNs and private placements at HSBC. “It was essential to move on day one.”
Marketing on the April 2071 issue began at the 4.15% area. But with peak demand at US$10bn, and final orders of US$6bn, leads were able to push pricing to 3.75%. That was inside the sovereign’s US dollar curve, with leads estimating fair value at 3.8%.
The final level also marked Mexico’s lowest coupon for a bond with a tenor longer than 30 years.
“There was a very strong book from Asia, which allowed the issuer to significantly tighten pricing,” said Hussain.
In the end, Taiwanese accounts were allocated about half of the paper.
The offering covered 35% of Mexico's foreign currency requirements under its 2021 funding plan, according to a tweet at the time by deputy finance minister Gabriel Yorio.
The deal, which is dual-listed in Luxembourg and Taipei, had additional benefits: by bringing new investors to the sovereign, it potentially boosted liquidity for its other long-dated bonds in the secondary market.
Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley were the joint bookrunners on the SEC-registered deal.
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