Mexico adds euros to century club

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Critics carp at cheap pricing; High yield and dollar trades fill pipeline.

By Rob Dwyer

Mexican issuers and euro currency deals continue to dominate Latin America’s international DCM markets and – in the case of the Mexican sovereign’s 100 year trade – dramatically so.

Mexico took advantage of benign market conditions, created by the European Central Bank’s quantitative easing programme, to become the first sovereign to sell a 100-year euro-denominated bond. Bankers now also report an active pipeline of high yield and US dollar-denominated trades waiting to come to market, which will add diversity in the coming months.

Mexico’s €1.5 billion century bond was the sovereign’s third euro-denominated trade this year – following two €1.25 billion deals (one nine year and the other 30 year) printed at the end of February. Taken with $2 billion in dollar bonds it sold in January, the United Mexican States has now completed its 2015 fund-raising needs.

The return to the European markets so soon after its earlier deal was opportunistic and, according to Alejandro Diaz de Leon, Mexico’s head of public credit, “would have been very hard to anticipate that we could push the maturity out to 100 years until just a few weeks before we announced”.

Alberto Ardura
The US high-yield market is on fire, and we think the dollar market is now open for Latin American high yield

Alberto Ardura, Deutsche Bank

However, Diaz de Leon says that the ECB’s monetary stimulus package surprised “on the upside and sent a very clear message about the willingness to extend throughout the yield spectrum and this provided significant compression throughout the term structure that provided a lot of interest and appetite for an ultra-long maturity bond like the one we issued.”

Diaz de Leon notes that little competing supply helped build solid demand, which meant the book was 4.2 times oversubscribed. The strength of the demand allowed the lead managers HSBC and Goldman Sachs to price a 4% coupon to yield 4.2%. While that represented tightening from initial price thoughts of 4.5%, one competing international DCM banker argued that the bond was priced “far, far too cheaply – I think [UMS] paid a huge and unwarranted premium. You saw in the aftermarket that the bond popped up six to seven points in one day, which means it was unnecessarily cheap for an issuer that is so highly rated as UMS.”

However, Diaz de Leon says the bond’s secondary performance isn’t a concern for the issuer: “[The secondary market performance] reflects several things, including the ample demand for the deal, which was more than €6.3 billion, and so there was a lot of investor demand that wasn’t satisfied [through primary distribution]. We wanted to issue a relatively low coupon so that we can fix expectations to that point and given the convexity that created it developed very good momentum. The new issue premium is very debatable, given this is something that hasn’t been issued before, but nonetheless it was a good transaction that made both the issuer and investors happy.”

Juan Claudio Fullaondo, managing director in HSBC’s global capital financing unit, covering Mexico, says: “UMS was looking at the very long end of the curve and obviously they were breaking ice with this deal – it was untouched territory for an EM issuer. The issuer’s objective was to set a new benchmark and leave it open for a re-tap and it was priced to do that. If you analyse the nominal rate for 100-year money, it’s a great deal for them.”

Diaz de Leon says a key motivation for the century bond was to lower refinancing risk and extend the average maturity of the issuer’s profile. He also says that investors in this transaction were markedly different from those in the sovereign’s other euro-denominated deals, earlier this year, and it therefore provided further diversification of the investor base.

He also says he will assess opportunities for retapping the bond (as it did with its 100 year US dollar-denominated bond). Also, despite the fact that the issuer has no further funding needs this year, he hints that its commitment to the Samurai market, and the expectation that bond conditions may deteriorate in 2016, means that UMS may conduct a Yen-denominated transaction which will “quite likely be in the near future”.

Mexico was also the source of another large deal in April when quasi-sovereign Pemex sold €2.25 billion in a dual tranche transaction. Barclays, BNP Paribas, Deutsche Bank and Santander were bookrunners on the deal that was able to price aggressively.

According to Alberto Ardura, head of capital markets and treasury solutions Latin America at Deutsche Bank, the new issue premia were just 10bp and 2bp on the seven and 12 year notes respectively.

Ardura characterizes the market as “very healthy” and says that while much of the issuance to date has been from sovereigns and quasi-sovereigns, which now are nearing annual fundraising targets, there is a lot of supply to come from other issuers.

At time of press, Deutsche Bank was close to bringing Guatemala’s BanTrab to market, after reopening a bond for Panamanian Global Bank earlier in April.

“The US high-yield market is on fire, and we think the dollar market is now open for Latin American high yield,” says Ardura.

Deutsche also sole-managed Cabei’s debut $50 million-equivalent PEN-denominated local market bond and Ardura thinks the sell-off in local currencies is leading to renewed interest in international deals denominated in local LatAm currencies. 

“We think, at current levels, many have oversold… as the volatility in these currencies has reduced, we expect investors to be looking at these types of transactions.”