Mexico priced its first US dollar sustainable bond on Monday, a US$2.2bn deal that allowed the Latin American sovereign to manage its liabilities and burnish its ESG credentials.
Proceeds from the offering are earmarked for refinancing, including concurrent bond tender offers. However, Mexico said it would invest a sum equal to the proceeds on programmes included in its fiscal 2022 budget that combat climate change and decrease social inequities in the country.
The financing was the inaugural US dollar bond under Mexico's Sustainable Development Goals Sovereign Bond Framework. Its first in any currency was an SDG offering in euros in September 2020. This time around, the ESG format helped Mexico attract an order book that was more than three times subscribed, market participants said.
"The SDG feature was obviously an addition to the transaction," said a banker familiar with the deal. "It helped anchor the trade because all accounts these days have an ESG angle, so they have pockets of ESG money."
The 4.875% global notes due 2033 printed at 98.123 to yield 5.105% or 235bp over Treasuries. Bookrunners BBVA, Goldman Sachs, JP Morgan and Natixis opened price talk at 265bp area over, set guidance at 235bp–240bp and launched at the tight end.
The pricing momentum benefited from the unexpectedly good US payroll number on August 5 and from the year's longest rally in emerging markets bonds – one that also encouraged Guatemala to price a deal on August 3. The JP Morgan Global Emerging Market Bond Index has risen about 6.9% since July 14, the date it hit its lowest point in 2022 following an 18% decline.
Deal window
"We took advantage of a window in which the market had not experienced an increase in volatility after an FOMC decision and prior to the release of inflation data [on Wednesday]," Mexico's deputy minister of finance Gabriel Yorio told IFR in an email.
Adding the sustainability feature to the mix helped support the deal in an already good market – so much so that one money manager said that after putting in an order for the bonds he pulled out because of the pricing pressure.
"It was an SDG bond, so it found strong demand from big ESG/green pockets," said Laszlo Lueska, portfolio manager of Brazilian fund manager Octante. "It tightened a lot, and I did not want to buy at those levels."
The offering, of course, had more than its ESG credentials to recommend it. The banker said investors liked that, at US$2.2bn, it was the first transaction of size in a long time from any issuer in the region. That Mexico is one of the strongest credits in LatAm also helped.
"The mood shifted in the last weeks, and Mexico is at the top of the list in the region for investors," he said.
Europe's Fideuram Asset Management was among money managers that liked the credit.
"The new issue was about 25bp cheap to the secondary curve so we participated," said Scott Fleming, global emerging markets portfolio manager at Fideuram.
Fleming said that Fideuram has an overweight position in Mexico, "given attractive valuations and solid credit fundamentals".
Switch tender
The transaction had two components. The first was a US$1.8bn offering placed through a regular bookbuilding process. Proceeds from this part will be used to redeem US$1.7bn of 3.60% Global notes due 2025, and repurchase or retire any other domestic or international debt.
The second component was a so-called switch tender. In this part of the transaction, investors traded in bonds with a US$487m face value from 12 series maturing between 2034 and 2061 for US$404m in new 2033 notes.
With the switch tender, Mexico gave investors the opportunity to trade in longer-term bonds for the shorter 2033s. The tender targeted US$31bn in outstanding securities, but only a very small percentage participated in this offer, showing that investors had little interest in reducing the duration of their Mexico sovereign risk, the banker said.
"Only a handful of accounts took up Mexico on the reduction opportunity," he said. "If you like the credit, why would you want to reduce exposure in a big way?"