The United Mexican States sprung an end-of-year surprise raid on Latin American debt markets last December with a $2 billion, 10-year global bond. As the first emerging markets sovereign issue since September 2008, the deal blazed a trail for subsequent borrowers Colombia, Brazil and Pemex, all of which have since issued bonds.
The deal took advantage of historically low yields on US Treasuries to print with a coupon of 5.95% and demonstrated investor hospitality for investment-grade credits.
Just one week before Christmas, the senior global bond, rated Baa1/BBB+, was priced at 99.784 to yield 5.98% or 390bp over US Treasuries, at the tight end of official guidance. The sovereign’s outstanding 5.625% 2017 bonds were trading at par and around 350bp over US Treasuries the day before, so Mexico paid an impressive 40bp concession.
Joint bookrunners Goldman Sachs and Morgan Stanley opened order books at 8.30am, informing investors of a benchmark size of around $1 billion and an estimated premium of 50bp. But after $3 billion of orders came flooding in by 9.30am, the leads were able to price a larger deal at the tight end of spread guidance – and with a smaller concession. Total orders reached $4 billion when the books closed at around 2.30pm.
Mexico’s outstanding bonds had earlier staged a modest rally that week as investors ploughed into defensive sovereign credits before year-end. In fact, there was a decoupling between equity and credit markets that week, with stock markets generally falling and credit markets tightening on the back of the US Federal Reserve’s zero-interest rates decision. As a result, the sovereign decided to grab the moment.
“We’ve been dealing with challenging financial markets, and some market participants might have assumed late December was not an ideal time to finance,” says James Esposito, global head of Goldman Sachs’ investment grade business. “However, 10-year Treasury yields touched 50-year lows, and UMS credit spreads ratcheted tighter over the week. The combination proved too tempting to ignore.”
Unusual Timing
Fears that markets could deteriorate further compelled the issuer back to the primary markets. “There is a lot of uncertainty about the direction of global markets as well as the evolution of Treasury yields, so we wanted to come to the market to address our financing requirements in 2009,” Gerardo Rodriguez, the country’s director of public credit, tells Emerging Markets.
Investors, though surprised at the timing of the launch, still participated. “I was very surprised to see this deal come to the market given the festive season,” said Claudia Calich, senior emerging markets portfolio manager at Invesco in New York, who nevertheless snapped up the paper.
Around 60% of participating investors were in the US, 35% in Latin America – mostly Mexican pension funds and banks – and 5% in Europe. Traditional hold-to-maturity investors – dedicated emerging market accounts and fund managers mainly focused on US high-grade deals – bought the bulk of the issue.
With the primary issue market languishing, Mexico moved to maximize investor attention by launching the deal before traffic from emerging market sovereigns built up in January and February this year.
At the time of the deal, the last Latin issuer to have braved the volatile cross-border bond market was the Caribbean island of Aruba in September with a paltry $57.3 million, five-year issue. The last $1 billion bond issue came in May when Pemex issued a $500 million, 30-year and $1 billion, 10-year dual tranche issue.
Rising Costs
Back in January 2008, Mexico had priced a $1.5 billion issue due 2040 at a 9bp–10bp concession. But given the jump in global funding costs, investment-grade issuers were paying higher spreads. Well-known high-grade US corporates were paying anything from 75bp to 125bp in new issue premiums in the few weeks prior to the Mexican deal. As a result, this issue secured an aggressive concession by comparison – as the scarcity of sovereign supply and investors’ desire to buy familiar names continues to suck in a respectable amount of liquidity.
The $2 billion deal sought to address the sovereign’s $3.2 billion external debt amortizations for this year and, at the time, fulfilled around a third of the country’s external financing needs for 2009, analysts estimated at the time.
But as the country slipped deeper into recession, Mexico once again surprised investors by launching a new $1.5 billion deal this February to buttress its deteriorating public finances. The country was forced to scrap a 21-year tranche and instead opted to issue a $1.5 billion, five-year bond to yield 6.010%, or 425bp over US Treasuries. Market indigestion for Mexican risk and investor wariness for long-dated paper derailed the 21-year issue. As a result, these events only underscore the canny execution and competitive pricing for December’s $2 billion 2019 notes.
The $2 billion deal enhances Mexico’s reputation as one of the most canny and investor-friendly borrowers amongst its sovereign peers. And the borrower may have helped to jumpstart the hard currency Latin sovereign bond market through this end-of-year benchmark surprise.
Still, the scrapped 21-year paper suggests that not even this most-coveted Latin issuer is immune to the savage repricing of risk that continues to plague global financial markets.