Mexico bucks the trend amid liquidity squeeze
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Emerging Markets

Mexico bucks the trend amid liquidity squeeze

Cemex scales down local market issue, but mortgage-backed securities on their way in 2008

Tight credit conditions and investor risk aversion are forcing Latin American issuers to postpone or downsize their bond deals this week, dashing hopes of a pre-Christmas flurry - although there were signs of life in Mexico.

“We had hoped corporates would brave the markets in this end of year-period but we have absolutely no deals in the pipeline. I have nothing to do but Christmas cards,” said one New York-based DCM banker.

Any activity was restricted to the Mexican local market, where the country’s top cement maker Cemex issued a two-tranche Ps2.45 billion ($224m) deal. It priced a Ps2 billion 3-year inflation-linked fixed-rate bond at 3.9%, 55bps over the sovereign. But it was forced to scale down the other 10-year tranche from Ps1 billion to Ps455 million because not enough investors were willing to accept the 4.4% coupon, or 70 bps over the sovereign. HSBC was the sole bookrunner.

The ‘AA+’ locally rated retailer is a frequent issuer but some investors fear a sharp drop in its cement sales next year due to the US downturn. One banker said the lack of appetite for this deal despite its inflation-linked format is indicative of the woeful state of the region’s debt markets. “This poor response for a good credit like Cemex highlights how US sub-prime woes are still impacting investor sentiment.”

Meanwhile, Gigante, the country’s fourth-largest retailer, launched a tender offer to repurchase $260 million of its debt on its senior bonds that mature in 2016 with an 8.75% coupon. The company offered an early consent premium equal to $20.00 per $1,000 principal amount of the tendered notes. Citi is managing the deal.

Observers say it is unclear whether this buyback is to do with the retailer banking on improved market conditions to seek better terms for its financing or whether this is in preparation for a possible sale of some of its business units next year.

Issuers are postponing local-currency and dollar-bond issues until next year, with at least a dozen deals being scrapped over the last two weeks, according to one market source. One banker revealed: “We had road-showed a good credit Brazilian corporate for a modest $150 million issue at a short maturity, but we had to cancel the deal last week because of the market turmoil”.

Another banker said starkly “We are doing nothing and have absolutely nothing in the pipeline, clearly the international bond market now has terrifying spreads”. Under these conditions, public debt instruments are most likely to be shunned in the forthcoming weeks, and market participants believe that some corporates are now raising capital through private placements to provide them with vital liquidity.

But another DCM banker warned issuers that spreads and prices may not improve in January as the US enters a mild recession. “The success of the region’s corporate deals is still largely dictated by external events in the US”.

Despite this inauspicious climate, Mexico’s largest mortgage lender, Infonavit, plans to issue up to 20 billion pesos ($1.83 billion) in mortgage-backed debt securities in 2008. The government-backed agency will offer three-quarters of these bonds domestically with 25% placed in foreign debt markets. Analysts say surging economic growth and domestic home sales driven by a burgeoning Mexican middle class will fuel investor appetite for these securities, despite anxiety toward the asset class following the US sub-prime mortgage crisis.

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This article was also published in Euroweek, the newspaper of the global capital markets.

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