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Mexico eyes sovereign sukuk

Latin America’s first such deal; Pemex plans to follow.

Mexico is considering issuing an inaugural sukuk bond, an official in the ministry of finance has told Euromoney. Pemex may follow.

The deal, which would be a regional first, would further enhance Mexico’s reputation as the region’s most innovative sovereign issuer. Pemex, Mexico’s national oil company, (which as Euromoney went to press was preparing to launch a European deal roadshow on October 27, led by Barclays, BNP Paribas, Deutsche Bank and Santander) also confirmed interest in a sukuk, although it is believed the company will probably wait for the sovereign to open the market first.

The sukuk market has been growing in popularity in recent years in other regions but, as yet, there has been no Latin American issuance. However, international DCM bankers say that a Mexican foray into this market would fit the sovereign’s debt strategy, which is to open new markets and aggressively diversify funding sources.

“Typically the Mexicans have been very active in the markets and they are communicating very well with the US, European and Asian markets. They have been willing to invest in developing more markets,” says one banker.

He attributes the greater effort and innovation from the Mexican public debt team as originating from need. “It initially had to do with the post-Lehman effect,” he says. “They were hit the hardest so they needed to look at new sources of funding and that created momentum – such as with the Japanese trades [samurai bonds] – which they are sustaining. To some extent their position now is a benefit of the fact that they were hit more than other sovereigns in Latin America because of their economy’s dependence with the US.”

While initially Mexico needed to access different pockets of investors to fulfill its financing needs, as its economy recovered the diversification also brought positive ratings attributes that speeded up the country’s rating upgrades, and the strategy is now an integral part of Mexico’s issuing plans.

In February 2014 Moody’s upgraded Mexico to A3 from Baa1, making it the second country after Chile to have a single-A rating from the agency.


Uruguay is another sovereign that has issued samurai bonds. “After the crisis in 2002/03 we had net public debt of 70% of GDP and almost 100% was denominated in US dollars,” says Mario Bergara, finance minister. “Now the landscape of public debt is very different, we have net-debt-to-GDP of 23% and two-thirds of that debt is denominated in local currency.”

Uruguay’s diversification of its internationally-denominated debt has insulated it from the recent appreciation in the dollar. The Uruguayan peso has depreciated by 25% against the dollar in 18 months but the new debt profile (the average maturity profile has also been extended to 15 years to reduce rollover risk) has led to “an almost zero negative effect”.

Other countries have been more content to access the liquidity on offer in the US dollar international market. One banker thinks that countries like Brazil could have done more to take advantage of recent benign conditions to diversify their funding away from the dollar market and set new currency benchmarks.

“There are two reasons why I think Brazil hasn’t copied Mexico in its international DCM strategy,” says the banker. “First, is arrogance. Brazil saw the market liquidity and thought that its time had come and they would always have access to these levels of US dollar liquidity. And second is the lack of human resources – it was overwhelming for them and too much to handle from an IR perspective. All of a sudden, its small IR team needed to reply to huge amounts of investor questions and they couldn’t physically cope with adding new markets to those teams.”

Leaders of the pack

However, another DCM banker covering Latin America for an international bank in New York disputes this. “Mexico might be the most sophisticated country but I think Brazil and Colombia are with them at the head of the pack,” he says. “The fact that Brazil doesn’t tap other markets doesn’t mean that it isn’t sophisticated. Brazil’s needs have been really small. They could tap any market they want but they have been tapping the dollar and you need to be a frequent issuer in that market.”

He points to the liability management exercise that Brazil conducted as proof of the sophistication of its team’s execution capabilities. The deal, led by Bank of America Merrill Lynch, Deutsche Bank and Itaú BBA in July this year, saw Brazil issue $2 billion of 2045s and $1.5 billion that it switched for $1.59 billion of outstanding notes – primarily its 7.125% 2037s of which it bought nearly $750 million in the market at 128.235% of par, as well as other notes in four other outstanding issues.

The new notes carried a 5% coupon and priced at 97.992 to yield 5.131%.

“That deal cleaned up the curve, retiring bonds at high dollar prices that were trading inefficiently,” says the banker. “The new yield curve really tightened and created a great benchmark for the private sector.”