Pemex had two big funding aims for 2004: to extend its domestic curve and to issue larger, liquid bonds in the international markets. It succeeded on both fronts."Last year marked an important change for Pemex, and we significantly increased our levels of funding in the domestic debt market," says Octavio Ornelas, managing director within the finance department at Pemex, the state-owned Mexican oil company. "If you look at 2002, virtually 100% of our financing was achieved in the international markets. In 2004, of the total $9.6 billion raised, 40% was in the domestic markets. In 2005 that split is likely to remain the same."
The majority of this local funding was achieved in the early part of last year, with two big placements in January and March totalling $2.5 billion. "As these transactions prove, there is a lot of liquidity in the local markets," says Ornelas.
On a more strategic note, at the end of December Pemex issued an equivalent $200 million, 15-year zero coupon bond. "This didn't equate to a great deal of money, but it was very important because of its 15-year duration. Pemex is helping to develop the long-end of the curve in the domestic bond market," he says.
Ornelas adds that the local markets remain a key focus for this year. Pemex is planning to raise close to $2.5 billion. "At the beginning of the year we did a single transaction totalling $1.4 billion. That just shows you what a huge demand there is for this type of placement," he says.
On the international markets Pemex, the eighth largest company of its kind in the world that produces around 5% of total global crude oil, was able to cherry-pick its deals.
Pivotal to 2004's funding objectives was to have bigger, more liquid transactions. "We were much more selective about the way we approached the international capital markets," says Ornelas.
In 2003 Pemex executed eight transactions, the biggest of which was $750 million. In 2004 the company did only three international deals, all much bigger in size.
In June Pemex executed a $1.5 billion of floating-rate notes that mature in 2010, while in November the company issued an †850 million, 12-year bond. "At the time we issued the floater, interest rates were going up and demand was huge for these kinds of instruments. Once we swapped to the fixed rate, this deal priced 50bp inside the fixed-dollar curve," says Ornelas.
The 12-year euro deal represented the next logical step for Pemex, as it had done a 10-year euro deal in 2003.
In September, Pemex launched the first-ever emerging market deal in the Perpetual market and the largest ever unsecured Latin American bond offering, with a $1.75 billion fixed-rate PerpNC5 bond issue.
The deal generated a stunning $5 billion order book, and pricing tightened by 25bp from original guidance talk.
Retail Asian investors bought into the deal in a big way, with 65% of total orders coming from that region. "There is increasing appetite from that part of the world, and we are hoping to continue to attract Asian investors, developing relationships with banks and institutional investors as well as with the retail investor base."
This year Pemex has continued its strategy to issue larger, more liquid deals. In February, the oil major issued a perfectly-timed †1 billion, 20-year euro-denominated bond, the longest-dated euro offering by an emerging market issuer.
Ornelas says that this deal encapsulates the merits of this new international funding strategy."By now the market knew about our funding policy and were aware that this could possibly be the one and only euro deal by Pemex this year," he says. "This changed the book-building exercise dramatically, and in the space of two hours we had an order book of †4 billion."
As a result, the transaction was completed in the space of four hours with a total of 330 different accounts participating. Ornelas says that significantly 80% of these accounts were high-grade investors. "This is a complete change for Pemex. Two years ago the majority of investors were dedicated emerging market accounts, with only a very small percentage place with high-grade investors."
He says that the increased size of the deals has also improved pricing. "When we had a lot of smaller, less liquid transactions, sometimes our spreads were wider than we might have wanted. Now we have larger, more liquid bonds, investors are not asking for a premium on liquidity grounds."
Ornelas says that these deals have also managed to diversify the investor base. "Before we might have a high concentration of our bonds in certain emerging market accounts, and they became the drivers of these transactions. That is no longer the case."
As ever, timing remains key, and yet again Pemex hit the nail on the head with February's bond coming at a time when high-grade corporate bond investors were starved of supply, yield and duration and when interest rates were trending lower in Europe. The deal prompted the tightening of the spread differential between the United States of Mexico and Pemex by around 10bp to 15bp in both euros and dollars.
Going forward, Pemex will continue to extend its curve in the domestic bond market. Of a total $8.5 billion, 40% is expected to be raised locally.
Internationally, Pemex will for the first time execute some asset management liability transactions. "This is something new for Pemex. We have a lot of bumps in the curve due to our old funding policy of issuing lots of smaller transactions, and this is making our secondary market inefficient," says Ornelas. "We plan to take out a lot of these transactions and replace them with big bonds in the more liquid part of the curve."