Mexico has long been one of the most innovative sovereign issuers when it comes to liability management. Now, the sovereign has become the first developing nation to sell warrants, allowing investors to exchange foreign debt with local.
Three warrants were sold in all, for $65 million, each one to international investors. And each warrant granted the holder the right to tender Mexican dollar-denominated debt in return for a peso-denominated Bono.
The $2.5 billion deal, lead managed by Credit Suisse and JPMorgan, is extremely clever on many levels. First, Mexico can raise money now by selling the warrants without increasing its indebtedness. Second, given that the warrants are worth money, it's safe to assume they will be exercised. Once that happens, Mexico will have less foreign debt and more domestic debt, making the country more creditworthy. Third, the deal smooths out the hedge fund front-running that is common when countries do bond swaps. If Mexico had simply announced a large dollar-for-peso bond exchange, the price of dollar bonds would have risen and the price of peso bonds would have fallen, damaging the Mexican domestic yield curve.
This way, the end result is the same, but there's much less market disruption along the way. Fourth, the warrants help to create a whole new investor base for domestic Mexican debt: there are many investors in Mexican dollar-denominated bonds who haven't dipped their toes into the peso market yet. These warrants could be just the encouragement they need.
Finally, the warrants carry an expiration date of about one year from now. "The expiration dates have likely been selected so that they go past the presidential elections [next July] and therefore any possible political noise in connection with it," says Gautam Jain of Barclays Capital.
Many mark-to-market investors are worried about buying Mexican instruments at the moment because they think thereÕs a good chance bond prices will fall across the board during the heat of the presidential campaign.
Assuming things return to normal after the election, however, the value of the warrants should be much more stable.