Best Borrower Latin America 2007
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Best Borrower Latin America 2007

United Mexican States

Mexico’s liability management moves and flawless capital-raising deals last year brought into sharp relief one central message: its sovereign debt office is firmly in the upper echelons of sophisticated financial managers. 

In 2007, United Mexican States (UMS) launched its biggest assault to date on the illiquid hard currency bonds in its debt portfolio, swapping these instruments for longer-dated local currency paper, and cannily boosting liquidity in key benchmark bonds. What’s more, Mexico reopened the market for cross-border sovereign paper in the second half of last year, managing to secure bargain premiums in the midst of the global credit crunch – a fact which led some observers to proclaim a new dawn for emerging markets decoupling. So in a year of standard liability management exercises in the region, Mexico’s innovative and progressive debt management strategy in 2007 deserves particular acclaim.

The sovereign started the year boldly with the mission of cleaning up its dollar curve, launching a swap and cash tender offer for a $2.27 billion retap of its 6.75%, 2034 bonds, and it paid $1 billion of cash for $2.8 billion-worth of old bonds due between 2019 and 2033. “We sought to enhance the benchmark status of reference bonds in our dollar curve as efficiently as possible. This is the context around which we decided to execute this public transaction,” Gerardo Rodriguez, deputy under-secretary for public credit at the Mexican finance ministry, tells Emerging Markets. Mexico decided to bite the bullet and announce a public exchange, leaving the country exposed to the unpredictable rough and tumble of market sentiment. And with yield-hungry investors lamenting the demise of sovereign paper and salivating over high coupons of the past, the government had much work to do to convince investors of the benefits of the exchange. But it did just that. 

Investors were asked to give up old bonds with coupons that ranged from 7.5% to 11.5% for 2034s that paid a more modest 6.75%. But it set a spread of 141bp on the new 2034s in exchange for old bonds that traded more tightly, offering a small concession for its 2019s, 2022s, 2026s, 2031s and 2033 bonds. It also offered to buy back up to $500 million-worth of paper with cash. Via leads Barclays and Morgan Stanley, 27% of $8.8 billion-worth of outstanding old bonds were exchanged, turning the 2034s into a highly liquid $3.6 billion benchmark.

The successful take-up of the public exchange is also down to the clear and transparent guidance from the debt management team and the faith foreign investors have acquired that domestic markets in Mexico can now offer significant liquidity, says Rodriguez. “We have been clear in outlining our main debt strategies, so this has given investors confidence and has allowed us to obtain a more liquid bond because of the high participation rate of this deal,” he says. 

Again in March, Latin America’s second biggest economy courted investor interest to swap hard currency bonds into new peso securities – this time by issuing warrants. This gave holders the right to swap $2 billion-worth of dollar debt maturing 2009 and 2033 for local peso Mbonos due 2014 and 10% Mbono due 2024.

The first tranche of the deal saw $3.5 billion in demand, pricing the exchange warrants at $61 million per unit. The second tranche was priced at E20 for 500,000 warrants, allowing holders of the paper to exchange $660 million-worth of lira, Deutschmark and euro denominated debt for the same 2014 and 2024 local peso bonds. So instead of demarcating these dollar bonds according to their maturity, the securities were pooled into two marketable warrant types, and their expiry dates were also staggered – ingeniously boosting secondary market liquidity.

New Money

In September, Mexico was rewarded for its sophisticated public financial management and promising growth prospects when it issued new money in the international markets for the first time since 2005, via leads Merrill Lynch and UBS.As issuers, bankers and investors were digesting the impact of the credit crunch, Mexico stuck to its guns and offered a $1 billion retap of its 2017 and 2034s, sucking in over $4 billion in demand, and securing astonishingly cheap funding. Yet there had been no comparable sovereign benchmark since July, which made the pricing guidance speculative, forcing Mexico to pay the unpredictable market-clearing premium. “The  market for Latin American issuers was closed over the summer, this  made pricing  more challenging . We were  also not  sure how volatile secondary prices would affect a primary  transaction and if  people were going to demand higher  new issue premiums,” Antonio Castano, debt capital markets banker at UBS, tells Emerging Markets.

But strong demand allowed the BBB-rated borrower at the time (upgraded to BBB+ by S&P in October) to price the deal competitively, with the 2017s and 2034s coming at concessions of 10.5bp and 8.9bp, respectively. This is fundamentally tighter than issues from US high-graders at the time, with AAA/AA borrowers forking out 20bp–25bp to the outstanding trade, while BBB names were paying a 15bp or more concession.

Rodriguez says that the passage of Mexico’s fiscal reform bill – which earned the sovereign an upgrade from Fitch to BBB+ from BBB the week before – provided him with confidence that the sovereign could attract competitive funding. “The new issue premiums were hovering around 20bp–25bp, but we were confident that, with the momentum generated from our economic reforms as well as the scarcity value of sovereign paper, the deal would be successful. In fact, when we announced the transaction, we were able to get it done in just a couple of hours.”

Castano explains that despite investor risk aversion, Mexico proved to be an easy pitch." The justification was the high quality of  Mexican bonds and  the scarcity value, considering  that you don’t really have much sovereign paper out there in the  market these  days.”

But the borrower could hardly be accused of exploiting its rare issuer status and vainly insisting on overly aggressive pricing since its 2017s and 2034s traded up in the initial aftermarket. By pricing more cheaply than US banks, in 2007 Mexico showed that sovereign paper could – at least for now – decouple from US high-grade names. And, having shaken off the stigma of multilateral and Brady debt, Mexico’s strongly focused liability management debt strategy in international markets last year demonstrated that domestic markets are now stronger than ever. 

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