Latin American deal of the year: Mexico’s $2.5 billion debt exchange warrants
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Latin American deal of the year: Mexico’s $2.5 billion debt exchange warrants

The country’s director of public credit came up with an idea that could transform emerging market sovereign debts.

At a glance:
United Mexican States
Deal type: Debt exchange warrants
Nominal size: $2.5 billion
Joint bookrunners: Credit Suisse, JPMorgan
Date: November 18, 2005

Mexico has long been at the forefront of innovation in sovereign liability management, and in 2005 it launched one of its most impressive deals to date, going well beyond a straightforward bond exchange.

Mexico has done such a good job of developing its yield curves in both pesos and dollars that bond exchanges are increasingly useless: anybody can buy one security and sell another, and there’s little point in doing so through the Mexican government rather than straightforwardly in the secondary market. And bond swaps can be harmful in the short term. If Mexico had simply announced a large dollar-for-peso bond exchange, hedge funds would immediately have started to front-run the deal, selling peso-denominated debt and damaging the Mexican domestic yield curve.

But Mexico still has a long-term goal of reducing its external debt and exchanging it for domestic debt, without adversely affecting either the dollar or peso curves.

The country also had a more immediate goal at the end of 2005: to make sure its debt markets sailed smoothly through the presidential election of 2006.

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