Mexico's ability to issue transactions that other Latin American sovereigns cannot even consider was demonstrated earlier this year when it launched its first bond in the UK market in over two decades.
Almost all Latin American borrowers are too low-rated to issue a sterling bond. Instead they rely on the dollar, euro (and very occasionally the yen) markets to help them with their financings. But Mexico's investment-grade rating means that it is able to tap less obvious sources of funding, such as UK institutional investors. Typically, these investors feel more comfortable buying better-established credits.
Mexico's £500 million, 20-year deal, which was launched in January, is the longest and biggest emerging markets bond in the EuroSterling market. The transaction was more than three times oversubscribed from its original benchmark size.
The bond helped Mexico to meet its main objectives in its external debt placements, says Andres Conesa, public credit director at the sovereign – “To diversify the investor base at a cost at least similar to that of our dollar curve,” he says. “In fact, the pricing was around 10bp through the dollar 2022 bond at the time.”
The deal showed strong performance in the sterling secondary market. On the first full day of secondary market trading, the deal, which was lead managed by Barclays Capital and HSBC, traded as tight as 5bp inside the re-offer price of 185bp over UK gilts. Almost all secondary market activity focused on the bid side, with a volume of £45 million, and net sellers of £10 million.
Many of the accounts that participated with sizeable orders were new to the Mexico name, thereby expanding the Latin nation's investor audience. The transaction, moreover, brought virtually the entire core high-grade sterling investor base to Mexico.
The offer attracted orders from more than 100 accounts – usually a sterling deal of this size involves only 15 to 30 accounts. The bond was increased from an original size of £250 million, with the order book exceeding £1 billion. The deal helped cover some early multilateral loan repayments and completed Mexico's funding needs for this year.
The sterling trade came during a record couple of months for emerging markets bond issuance. January alone saw over $7 billion of international deals as borrowers sought to take advantage of low interest rates and rising investor demand for higher-yielding debt to meet financing needs.
Mexico's sterling issue was the latest in a number of innovative transactions undertaken by the sovereign in the past two years. In February 2003, the Latin nation became the first emerging market borrower to issue bonds with Collective Action Clauses in a deal worth $1 billion. Also last year, Mexico succeeded in retiring early nearly $4 billion of Brady bond debt, a hangover from the country's financial crisis in the 1990s. Then this January, the sovereign issued a five-year floating-rate note as it sought to take advantage of investor appetite for floating-rate paper.
Issuer: United Mexican States
Date of launch: January 21, 2004
Amount: £500 million
Maturity: 20 years
Coupon: 6.75%
Credit ratings: Baa2 (Moody’s); BBB- (S&P)
Lead managers: Barclays Capital, HSBC