Mexico’s global 2017 bond, launched in March, stands out among Latin deals this year not so much for its careful execution, which generated immense enthusiasm in the market, drawing in $3 billion of fresh cash. Rather, the deal is striking for what it signifies about the sovereign’s debt management strategy – and ultimately Mexico’s behaviour as a developed-market issuer.
For a start, the deal wasn’t strictly necessary – and therein lies its clever twist. Mexico is no longer issuing debt in foreign currency. The government finances itself with local currency bonds, many bought by the growing crop of Mexican institutional investors, especially pension funds, mutual funds and the insurance sector. Yet the bond turned out to be the biggest ever new cash deal done by a Latin American sovereign – and it came in with the lowest spread on any Mexican 10-year bond.
Unlike so much other Latin American issuance of late, the bond was not a swap, but rather allowed investors to retire plain vanilla bullet bonds, so anxiety to get rid of bonds was not an incentive factor. “You actually had people willing to put down cash,” says Richard McNeil, head of the Latin America debt capital markets group at Goldman Sachs, one of the two lead managers of the deal, along with Morgan Stanley.
Why did Mexico go to the international market when it can do its financing at home? “It makes sense to maintain pressure in international capital markets to make sure we continue to have well developed and liquid references along our yield curves,” Gerardo Rodriguez, general director of public credit at the finance ministry, tells Emerging Markets.
The strong investor response to the deal allowed the bond to establish a very large dot on the Mexican yield curve which, these days, is increasingly less populated, thanks to the steady reduction of foreign debt and the ever-longer maturities of bonds. “We think it allows us to establish a new benchmark – a reference bond for investors who want to gain exposure to Mexico in the dollar market,” Rodriguez says.
The 10-year maturity sets a long-lived benchmark, helps extend Mexico’s debt profile and is highly liquid. By setting a 10-year tenor, the Mexican government placed the bond strategically in a deep segment of the market, right where short-term and long-term investors overlap, says McNeil.
“The bond solidified the perception in the market that Mexico won’t be coming to market for budgetary purposes anytime soon,” adds McNeil.
The operation allowed Mexico to tidy up its dollar and euro yield curves by tendering 25 different bond issues. All UMS bonds maturing between 2001 and 2033 could be swapped except for three important reference bonds: the dollar-denominated 2034 and the euro-denominated 2015 and 2020. Many investors did swap the eligible bonds, but others, who had not previously held Mexican paper, bought the bond outright.
The global 2017 priced almost exactly at the government target, selling for 5.376% at maturity, the equivalent of 105 basis points above US Treasury bonds.
Despite having the benefit of an investment-grade rating, the Mexican government used the bond launch as an opportunity to inform and educate investors. Goldman Sachs commends the methodical approach adopted in going to market. “Mexico behaved much more like a developed market issuer – it took the time to execute the deal properly, beat the bushes and have a roadshow” which included meetings with investors in the United States, Europe and Asia, says McNeil, who advised the government to do so.
The March issue is the latest in a sequence of transactions that, taken together, are reducing Mexico’s foreign debt burden and servicing costs. In November 2005, Mexico became the first sovereign in emerging markets ever to issue warrants, when the government launched a series of three warrants that would allow their holders to exchange expiring dollar bonds for Mexican development bonds (known as “bondes”), fixed-rate bonds issued in local currency. The warrants were four times oversubscribed by more than 60 institutional investors in the United States, Europe and Mexico, and the deal was closed for $2.5 billion.
A similar operation in March was triple oversubscribed and allowed Mexico to swap E600 million of foreign debt for peso debt.
During the administration of president Vicente Fox, whose six-year term ends on December 1, Mexico has reduced its foreign debt substantially, from 45% of GDP in 2000 to 27% of GDP by the end of this year. These moves also reduce debt service: the sensitivity of Mexico’s debt to changes in international and local interest rates and foreign exchange rates has been cut by more than half.
Despite these recent successes, Mexican officials are eager to find new ways of reshaping their sizeable debt. To that end, a new benchmark in Mexico’s liability management is on the horizon. In the last quarter of this year, Mexico is expected to launch, for the first time ever, a 30-year bond in _______ currency. That would reshape the debt, elongating the profile of maturities.
Issuer: Republic of Mexico
Date of launch: March 3, 2006
Amount: $3 billion
Maturity: 10 years
Joint lead managers: Goldman Sachs, Morgan Stanley
name of deal: [am getting name fr MoF]