Samurai bond: Mexico diversifies via Japan

By:
Rob Dwyer
Published on:

Samurai deal consolidated; diversification in face of uncertainty.

Mexico’s strategy of diversifying its investor base is succeeding, say bankers, following the sovereign’s multi-tranche samurai transaction, which was priced on July 15 and included a 20-year tenor.

The issuer had approached the market with the intention of extending its yen-based funding yield curve with a 10-year trade; previously the longest dated notes sold by Mexico were six years. However, during marketing the sovereign had a reverse enquiry for 20-year debt so it consolidated the appetite for the three- and five-year tranche into a five year, and scrapped the proposed three-year tranche. The 10-year remained and, including the 20-year paper, Mexico saw huge interest in the issue, increasing the total deal to ¥60 billion ($592 million), from the targeted ¥50 billion.

Increasingly diversified: outstanding public
external debt by place of issue
Mexico_japan_graph
Source: Ministry of finance, Mexico

According to Moody’s, Mexico becomes the first country in Latin America to issue a samurai bond of that maturity, and the first emerging market sovereign to place a 20-year bond in Japan’s domestic market since 2008.

Mexico, which is rated A3/BBB+/BBB+, priced the 10-year bond with a lower spread than it had paid on the three-year tranche of the sovereign’s previous samurai transaction last July. Led by Citi, Mizuho and Nomura, the 1.44% ¥13.9 billion 2024 was priced at a spread of 70 basis points, the bottom end of the 70bp to 75bp guidance. A 0.8% ¥33.8 billion five-year tranche was priced at Japanese swaps plus 50bp; the ¥12.3 billion 2034 tranche was priced to yield 2.57%.

Yen securities

Looser monetary policy from the Bank of Japan has lowered rates generally in the Japanese market and helped the issuer achieve the lowest yielding yen securities the sovereign has ever issued. However, Alejandro Diaz de Leon, head of Mexico’s public credit, said that he believed the record pricing was also testament to the commitment the country has shown to the market and the improving credit profile of the sovereign, which he says has particularly benefited from Moody’s February upgrade to single-A.

"In July last year, when we issued our last samurai, monetary policy was already in expansionary mode in Japan, and so I would say this pricing is more reflective of what has been happening in Mexico, in terms of upgrade, and the structural reforms – particularly the energy reforms, which have created a good momentum for Mexico, and I think that these are the additional elements that have improved this year’s transaction," says Diaz de Leon.

Demand reached ¥130 billion, or more than 2.5 times the original deal size. A banker on the deal says that level of oversubscription is "very unusual in the samurai market". Mexico increased the deal with more than 70 accounts participating. One banker on the deal says they could have sold "considerably more", but did not push because it did not need the incremental funding.

Diaz de Leon gives a heavy hint that the proceeds have not been swapped into dollars or pesos. "Being a sovereign issuer, we are not compelled to swap in a short window of time," he says. "We can maintain the [currency] position until maturity or we can hedge it, based on the conditions of the swap market. We tend to separate those decisions. July is a good month to execute transactions in Japan because June/July are months of redemptions and it is a new fiscal year. So based on local considerations – and the drawback of the monetary stimulus that is on the way in Japan – we saw a good execution window. But we don’t need to have good windows for both execution and hedging at the same moment."

Diversity

As well as low cost of finance, the transaction furthers Mexico’s aim to diversify funding sources. The sovereign has been active in the US, sterling and euro markets this year. This transaction was done without any JBIC support: since Mexico re-entered the samurai market after an absence of 15 years, its previous transactions all had formal support sponsorship or investment participation from the Japanese state bank as an investor. For the banker who was on it, the transaction shows the value of committing to regular issuances in target markets: "[Mexico] has done an excellent job in engaging with accounts. It has done countless visits to the country to meet investors and is now very established."

Diaz de Leon also says returning to the samurai market "required considerable effort", but part of the rationale of establishing its renewed presence was to pave the way for Mexican companies.

The banker on the deal says that despite the low absolute coupon, the all-in cost, including FX swaps, is not compelling for Mexican companies that do not have natural yen-revenues, so the potential pool of corporate issuers is small.

"But for the right borrowers it’s a wonderful market, and we are glad to see this progress," he says. "Two decades ago Japanese investors in the samurai were a big part of this [international DCM] space and we have seen that rebuilding, as we have with euros and even sterling. It’s healthy – we are in a very liquid environment right now – and the dollar market has shined from this liquidity – but in the years ahead, as things get a little more wobbly as we enter the next stage of the global interest rate cycle, Latin America issuers will benefit from having access to multiple markets."