Last December, Mexican cement giant Cemex made history in Latin America’s debt markets by issuing a $1.25 billion perpetual hybrid bond – an innovative and complex security billed as the first of its kind to be launched south of the border. The deal set a benchmark for future bond trades in Latin America where corporate debt issuance is booming while the sovereign bond market continues to deteriorate. “We haven’t seen many deals like this in the region,” says Jose Collabasi, an analyst with ratings agency Standard & Poor’s in Mexico City. “It was a very complex deal and one of the first perpetual hybrids on the Latin American corporates market.”
Barclays and JP Morgan led the two-tranche deal, which was structured as a $900 million, 10-year bond and $350 million, five-year note paying coupons of 6.722% and 6.196% respectively. Cemex, the world’s third-largest cement company, sold the bond to bankroll its $1.28 billion hostile takeover bid for Australian building materials company Rinker Group. The leads began price talk at 180 basis points but were able to price the 10-year and five-year notes at a tight 220bp and 170bp after receiving $4.25 billion of demand. The deal also features a rich 427.7bp to 471bp coupon step-up if the notes are not redeemed on their callable dates.Cemex wanted to fund the bonds in Japanese yen.
Therefore, the banks set up a special vehicle to exchange the company’s upcoming yen coupon payments into US dollars. The deal’s innovative structure enabled Cemex, which has high bank loan exposure, to get equity accounting treatment and obtain more favourable loan terms. In addition, it allowed it to fund itself in yen to cut borrowing costs and shield itself from the negative impact that currency fluctuations could have on the value of its Asian assets. “The company wanted to fund itself in yen to benefit from Japan’s low interest rates and avoid the negative impact that currency fluctuations could have on its balance sheet and earnings flows,” says Cynthia Powell, head of emerging markets syndicate at JP Morgan.
More options than ever The fact that Cemex was able to raise such a large sum in a corporate bond sale shows investors’ voracious appetite for Latin corporate debt, despite the economic and political risks traditionally associated with investing in the region. “Latin American corporates have more borrowing options than ever before,” Powell says, adding that selling the Cemex story would have been tougher a couple of years ago. “The markets are very risk aggressive. Banks are ready to lend cash while the local debt and equity markets are very liquid.” Cemex’s profile as an expansionist global blue chip helped to seduce investors, she notes. “Investors are looking to diversify their portfolios and want new names.
However, for this type of structure, you want to choose a great blue chip, and Cemex is that company. There is no question about its creditworthiness.” Latin America’s corporate heavyweights could use the Cemex deal as a proxy for future issuance, bankers say, adding that highly acquisitory firms with foreign assets such as Cemex are most likely to benefit. Bankers would not venture to say who such a company might be, but Brazil’s Companhia Siderurgia Nacional is understood to be seeking acquisition-related financing this year.
Asked whether a global capital markets crisis (following February’s equities sell-off) would hurt pricing for Latin bond deals, bankers say the region has never been more prepared to sail through such a storm. “We have seen four years of very benign markets, and the region’s governments have strengthened their economic fundamentals,” says Carlos Mauleon, director of Latin America investment banking and debt capital markets at Barclays.
“Over the last decade, the Mexican government has reduced its external debt from 80% of its liabilities to roughly 25%, and the Colombias, the Perus, the Brazils and the Panamas of this world have taken advantage of their countries’ macroeconomic stability to further strengthen their fiscal and monetary policies in many ways.” In 2007, Latin America’s corporate bond market is forecast to surpass last year’s record-breaking gains as a string of smaller and more speculative enterprises court funds from yield-hungry investors.