Sovereign issuance: Mexico shouts about its entry into the A-club
Makes statement with 100-year sterling bond; more splash than a perp, says issuing official.
Mexico celebrated its upgrade by Moody’s to A by selling a £1 billion ($1.65 billion), 100–year bond. The deal was sold in early March, a little over a month after the agency’s upgrade to its fourth-highest rating and the highest ever for the sovereign. The 100-year tenor is intended to make a statement about Mexico’s positive outlook and to differentiate the country from the negative sentiment surrounding other Latin American and emerging markets countries.
"[The 100–year tenor] clearly highlighted that this is the first transaction in the international markets after the upgrade to single A, the first time that Mexico has been given such a rating by one of the three large rating agencies, and that clearly contributes to our strong narrative," says Alejandro Díaz de Léon, Mexico’s head of public credit. "Mexico is an emerging market with significant differences. Many other [emerging market countries] are facing volatility, and this deal highlights the financial access that Mexico has and tries to differentiate Mexico vis-à-vis other countries that have been in rougher waters."
Díaz de Léon declined to name individual countries from which Mexico would like to differentiate itself, but a couple of weeks later Brazil was downgraded by Standard & Poor’s to its lowest investment-grade rating. That downgrade emphasized the difference in momentum between Latin America’s two largest economies.
Mexico has conducted similar statement trades in the past and has issued two century dollar-denominated bonds, which are used as benchmarks for its sterling bond.
"We had our previous 100-year dollar bonds as reference for size and pricing, and this transaction was very successful in both dimensions," says Díaz de Léon. "The size was about 60% higher than our two previous centennial bonds – which sends a very powerful message – as did the yield."
Mexico’s first 100-year bond priced to yield 6.1% and its second 5.96%. The sterling transaction priced a 5.625% coupon to yield 5.75% (after early guidance of 6%). The deal was led by Barclays and Goldman Sachs and was increased from £300 million after it attracted £2.5 billion in orders from 150 accounts.
|Raul Martinez-Ostos, Barclays’ country head of Mexico|
Raul Martinez-Ostos, Barclays’ country head of Mexico, says the bank used a recent 100-year sterling bond from Electricité de France, which Barclays also led, as a benchmark. The EdF deal, rated Aa3/A+/A+, was trading with a yield of between 5.125% and 5.25% during the roadshow, with EdF trading inside Mexico by about 25 basis points on comparable dollar curves – both have 30-year dollar-denominated bonds. "The EdF transaction gave us the confidence that we could do a very successful deal in sterling for Mexico, as well as being a very good reference to price the transaction," says Martinez-Ostos. Díaz de Léon says the EdF transaction convinced the sovereign to go for a 100-year bond rather than other potential eye-catching structures such as a perpetual.
Martinez-Ostos says the statement effect of a 100-year bond is greater than that of a perpetual. "A perpetual is a completely different animal," he says. "A perpetual is more focused on Asian retail accounts. Yes, some institutional investors come in [to the book], but the splash that you want to create is much more apparent with traditional institutional investors with a 100-year bond."
Martinez-Ostos says people remember the dollar-denominated bonds, and the intangible impact of raising the profile of Mexico with institutional investors shouldn’t be underestimated: "You get a lot more questions and investors look a lot more closely than they do with a traditional 10-year bond or from a re-tap of the 30-year bond. These deals make a statement and capture attention about the fact that Mexico is now A-rated. These intangibles are very important for sovereigns, especially when other issuers are finding that doing long-dated bonds isn’t easy."
Critics of the trade say that paying for publicity is inefficient and that the sovereign should build liquid curves that are of more direct relevance for other Mexican issuers. Díaz de Léon uses the difference in yield between the country’s 30-year and 100-year dollar bonds to price the difference between the two tenors at about 70 basis points.
"That’s 70 basis points for locking away refinancing risk for another 70 years and that is useful," he says. "You can always get into the debate about whether to go for lower tenors and rotate or pay a little extra for extension in duration and average maturity, but in this regard, given the level of the pricing, it clearly contributes to the loan portfolio."
The trade also fulfilled the sovereign’s objective of diversifying funding sources. Mexico has recently tapped the yen market but this transaction is the first sterling deal for nine years.
Díaz de Léon says Mexico isn’t hedging any of the sterling foreign exchange risk and is comfortable with the country’s aggregated currency exposure. "We keep our positions in these currencies and it gives us a significant diversification effect," he says. "[For example], we have done a lot of yen issuance in the last four years and the depreciation of the yen that has taken place in the last year has had a significant benefit to our position."