For years, Mexico has been at the vanguard of innovation in sovereign liability management. Last year, it launched one of its most impressive deals to date, taking the notion of a bond exchange to a new height of originality.
Led by JP Morgan and Credit Suisse, the sovereign’s $2.5 billion debt exchange warrants was a first of its kind in the international markets.
Mexico has had a long-standing goal of reducing its external debt and exchanging it for domestic debt, without undermining either the peso or dollar curves. This time, Gerardo Rodriguez, the country’s director of public credit, chose to issue warrants which allow holders of external debt – domestic or foreign – to swap that debt into long-dated peso denominated bonds after the presidential election in July.
Mexico’s move marked one of the boldest attempts yet by a sovereign or corporate borrower in the region to replace its external debt with bonds in their home currencies, reducing exposure to external market and currency shocks.
“The deal sets a precedent not only for emerging markets but also for non-emerging markets that are trying to do the switch but lack a deep or complete local curve,” says Gabriel Bochi, head of Latin debt capital markets at JP Morgan.
Under the novel structure, investors have at least 10 months to prepare for the exchange and learn about the peso market, as opposed to the more typical exchange offer which takes place within a few weeks.
“The mechanism we used was the most innovative,” says Bochi. “Mexico chose that mechanism because they wanted a gradual, smooth transition from foreign to local debt.”
The new Mexican exchange will comprise three series of warrants: XW20, XW10 and XW5, which can be exercised on September 1, October 10 and November 9. The three existing peso bonds that investors can exchange into will be reopened if investors decide to use the warrants.
“This deal was thoughtful in that it gave investors a lot of flexibility,” says Michael Schoen, managing director and head of Latin debt capital markets at Credit Suisse.
Latin American borrowers are profiting from the growing strength of domestic investors and their increasing willingness to take maturity and interest rate risk.
Although international investors already play heavily in the Mexican peso government bond market, Mexico is hoping the exchange offer will bring in many more investors.
Issuer: United Mexican States
Date of launch: 18 November 2005
Amount: $2.5 billion
Lead managers: Credit Suisse, JP Morgan