Mexico has long considered itself a groundbreaker in international debt capital markets. But its latest attempt to make history fell rather flat: it was downsized by $2 billion in the face of weak demand for the new debt part of the deal.
Mexico was nothing if not ambitious. The goal was to pull off one of the largest liability management operations ever seen: a tender offer and simultaneous bond issue, both of which might be as big as $5 billion.
The bankers involved were particularly keen on the $5 billion headline figure, says one source close to the deal. Mexico’s new bond, somewhere in the 10-year part of the yield curve, would at that size immediately become the most important benchmark bond issue, both for the sovereign and for the country’s corporate issuers.
The deal made some sense. As Mexico’s country risk has come down to all-time lows inside 100 basis points over treasuries, its outstanding stock of dollar debt has become increasingly illiquid, with prices rising to well above par. Illiquidity breeds inefficiency, so the idea was born to retire a large amount of that unloved debt and replace it with something much more useful. Mexico also wanted to attract brand-new investors into the credit.
Finding takers for the first part of the deal was not a problem. It got well over $5 billion in non-competitive tenders from investors perfectly happy to accept a buyback at the maximum spread over treasuries. But when the country launched its new 2017 bond in March, the leads had enormous difficulty building a high-quality book. The treasury market had been rocky that week, and spreads had not widened in response, so investors were cautious, waiting for the other shoe to drop.
In the end, the new bond issue was downsized to $3 billion, and the buyback was scaled back accordingly, along with the fees for Morgan Stanley and Goldman Sachs.
Wall Street was not impressed. “To be able to differentiate from other bonds on the curve, and be a real benchmark bond, a size greater than $4 billion would likely have been more appropriate,” says Gautam Jain of Barclays Capital. Other market participants murmured that the country should have been able to raise the full $5 billion, especially given that it was intending to get that much back from investors in the tender offer.
But investors weren’t interested in buying $5 billion of bonds at an 11-year maturity. When Edgardo Sternberg, an analyst at Loomis Sayles in Boston, found out about the deal, he recalls: “I said that’s too much to do on the dollar curve.” Mexico has now made it so easy for foreign investors to buy its MBono10 peso-denominated debt at much higher yields that the dollar debt seems anaemic in comparison.
