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Liability management: Mexico falls short of grand ambitions

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.

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