Investors gripped by Pemex $2bn benchmark

Mexican state-owned oil company Pemex thrilled Latin markets this week by pricing a $2bn 10 year benchmark with a hefty $6bn of demand, boosting hopes top quality private sector borrowers will soon come to the market.

  • By Sid Verma
  • 30 Jan 2009
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Mexican state-owned oil company Pemex thrilled Latin markets this week by pricing a $2bn 10 year benchmark with a hefty $6bn of demand, boosting hopes top quality private sector borrowers will soon come to the market.

In addition, low absolute US Treasury yields helped to reduce the all-in yield costs of the 2019 deal and placed a ceiling on the new issue concession despite the historically wide secondary levels on Pemex’s existing curve. As a result, this corporate deal — along with Chilean copper producer Codelco’s successful $600m issue last week — is encouraging issuers that external markets are open for investment grade issuers willing to offer a discount.

On Tuesday, the Mexican quasi-sovereign priced its $2bn 2019 bonds at 99.130, with an 8% coupon to yield 8.250% and equating to 570.7bp over US Treasuries. The lead managers Calyon, Citigroup and HSBC with co-manager Santander took advantage of the relative stability in Latin credit markets and higher US stock indices early in the week to launch the deal for the BBB+/Baa1/BBB rated issuer.

One lead manager said that the market tone on Monday and Tuesday offered "a breather from the volatility and we wanted to go out to investors before the Federal Open Market Committee’s statement on Wednesday".

At 9am the leads sent out soft guidance of 8.5% for a benchmark issue to investors. This would have represented a 35bp-50bp premium over its underlying curve, bankers away from the transaction calculated.

However, the senior unsecured medium term notes sucked in around $3bn by 11am. This allowed the leads to send out official price guidance of 8.25%-8.375% at midday and to price the 144A deal this tight while increasing the total to $2bn that afternoon.

Investors are increasingly discriminating between sovereigns and government-owned corporates.Pemex has a well known and liquid borrowing profile. As a result, its 2018s were referenced for pricing rather than Mexican government debt. On Tuesday morning, the 2018 notes yielded around 8.11%.

Bankers say the 8.25% yield represents a new issue concession of around 15bp-20bp. One banker pointed out that compensation for paper with an extra 15 month duration to the 2018s would, in theory, be around 5bp-10bp. On this basis, Pemex got a good price for the deal considering Codelco’s 35bp-45bp new issue premium for its $600m 10 year bond last week and the 40bp Mexico paid for its $2bn debt sale in December.

Spread betting

Since the start of the credit crunch in August 2007, Latin spreads have remained tight relative to other emerging market borrowers. But investors and debt origination bankers now say secondary levels have widened to reflect the deterioration in global credit markets and make pricing new risk a little easier.

Over the past month, Pemex’s 2018s have been trading at a historical wide of around 200bp to the sovereign due to declining commodity prices and in anticipation of new debt supply. Pemex’s low new issue concession compared with its 2018 issue should, therefore, be seen in this context, said Matt Ryan who manages $3bn in EM fixed income assets at Boston-based MFS Investment Management.

"The 2018s should have been trading tighter relative to the sovereign and this helped to ensure a relatively low new issue concession for the 2019s while making the bonds cheap enough for us to buy."

Claudia Calich, senior emerging markets portfolio manager at Invesco in New York, said that downside adjustment in Pemex’s spreads had helped investors to take on new risk. But she reduced her orders for the sale when official pricing was set at 8.25% on Tuesday afternoon.

Going local

This transaction was issued as a direct obligation of Pemex rather than through its special purpose vehicle, the Pemex Project Funding Master Trust. This fulfilled the regulatory requirements for Mexican domestic investors to participate who benefit from swapping back the dollar-denominated paper to fixed rate pesos to get a juicy pick-up to the local curve.

The structure of the transaction raised hopes that local bids would power the deal, especially given that regional players bought 35% of Mexico’s $2bn deal in December. However, in the end around 70% of the Pemex paper was sold in the US, 15% in Europe and around 12%-15% in Mexico. About 250 accounts bought the paper with fund managers taking 70%, pension funds 15%, and banks 10%.

The bond was quoted above par and even a point higher in the immediate aftermarket. Rival banks were complimentary about the pricing and execution of the deal. "This got a lot of money at a fairly tight level so this is positive for the market and should encourage other potential issuers out there," said one Latin debt origination banker in New York.

"Considering Pemex is inefficiently run and seen as a cash cow for the Mexican government, it is nice to see strong investor demand," said the banker. On Monday, Fitch revised downwards its ‘BBB’ outlook on Pemex from positive to stable, citing lower oil prices. This is the first deal from Pemex since it issued its $500m 6.640% 2038s last May. It plans to increase its debt burden by around $3bn this year and this week’s capital raising will be used to finance its 2009 investment programme.

Rival bankers speculate that Calyon and Santander — banks with relative small global debt distribution capabilities — were recruited to help manage the 2019 deal in return for providing cash to the company over the last year.

News that Santander was recruited as co-manager only after the deal was announced further fuelled this rumour. Bankers on the transaction did not comment. The issuer paid 45bp in fees — an indication that compensation for executing new emerging market corporate deals may be rising.

Pemex deal ignites hopes

Bankers have seized upon Pemex’s deal to explain to potential issuers that relatively low coupons can now be priced due to the low absolute levels of US Treasuries that are reducing the all-in yield costs of new deals.

Pemex tends to be a benchmark setter primarily for Mexican corporates. However, there is little hope that its investment grade domestic counterparts such as broadcaster Televisar and mobile network operator America Movíl will issue new bonds soon, due to their low refinancing needs and the high spread levels for the existing debt.

The market will be most hospitable to debt issued by state-run Brazilian bank, BNDES, as well as Andean multilateral institution, CAF. In addition, bankers are advising less elite credits "to come now when the market window is definitely open for sovereigns and quasi-sovereigns — we need a non-government owned corporate to test the waters," said a debt syndicate head in New York.

Meanwhile, the Republic of Peru is attempting to court reverse enquiry orders to allow it to issue a 30 year deal rather than a 10 year benchmark, said an adviser on the long-awaited issue.

Petrobras shelves bond plans

Despite the positive response to Pemex’s deal, Brazilian government-owned oil company Petrobras said no new bonds would be issued this year as borrowing costs were still too high. "Petrobras’s risk curve needs to be more realistic than it is today. We need to observe the market conditions and go to the market when they are more favourable," said its chief executive, José Sergio Gabrielli this week.

The company has secured $12.5bn from the country’s state development bank, BNDES, and intends to borrow around $5bn in the international loan market. However, Petrobras has an aggressive $174.4bn investment programme for 2009-2014 and will definitely need to seek alternative sources of cash over the next two years, say analysts.

In any case, it is expected that the $5bn loan will be repaid through dollar-denominated bond sales when market conditions are deemed more favourable. Petrobras reopened the Latin corporate market with a $750m 2018 issue last January with a yield of 5.86%, 205bp over US Treasuries. However, the cost-conscious borrower would expect a sub-8% coupon for any new 10 year benchmark, said a banker in talks with the firm.

However, he said the 2018s notes are only trading 130bp over the Brazilian sovereign while Pemex’s 2018 paper was wide 200bp-230bp to Mexico before this week’s debt sale — demonstrating the price sensitivity of the Brazilian firm.

In February 2008, Petrobras abruptly postponed its $500m re-opening of its global 2016s after failing to attract enough investors for aver 5bp concession offer at 210bp over US Treasuries.

  • By Sid Verma
  • 30 Jan 2009

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 313,852.39 1175 8.95%
2 JPMorgan 286,674.13 1305 8.17%
3 Bank of America Merrill Lynch 281,869.72 974 8.04%
4 Goldman Sachs 214,547.99 704 6.12%
5 Barclays 205,147.76 790 5.85%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Deutsche Bank 31,971.88 102 6.87%
2 HSBC 31,940.18 140 6.87%
3 Bank of America Merrill Lynch 29,065.55 82 6.25%
4 BNP Paribas 24,679.63 135 5.30%
5 SG Corporate & Investment Banking 22,195.55 122 4.77%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 14,960.44 66 7.87%
2 Morgan Stanley 13,992.90 72 7.37%
3 Citi 13,566.56 83 7.14%
4 UBS 13,028.25 52 6.86%
5 Goldman Sachs 11,994.74 65 6.31%