Latin Finance - September/October 2010 - 90

Mexico sovereign financing

Euro Campaign Kicks Off
by James Crombie exico’s first eurodenominated bond since 2005 kicks off a plan to tap the European investor base much more frequently, the issuer tells LatinFinance. “We view this transaction as a first step towards a more recurrent presence,” says Gerardo Rodríguez, Mexico’s deputy undersecretary for public credit, speaking of the €850 million seven-year global issued in July. “We may be in a position to perhaps come back to the euro market once or twice a year . . . I’m sure that the deal is going to perform well in the secondary market and based on that we may re-establish Mexico’s issuance program,” he adds. Mexico priced the 2017 at 99.757 with a 4.250% coupon to yield 4.291%. It was upsized from €750 million after demand reached around €1.6 billion, and came tight to swaps plus 185 basis points area guidance. Further growth and tightening were possible, but the issuer chose to optimize performance, says a banker close to the trade. Versus dollars, the deal came in line with secondary trade before launch. The Mexico dollar 2017 was around 150-160 basis points over swaps, according to Rodríguez, who says the spread was in line with the 20-30 basis points spread differential between the two currencies. He adds that it came between the existing illiquid 2015 and 2020 benchmarks. The sovereign had been weighing euros for the prior 12-18 months, but took advantage of improvement in Mexico’s fundamentals and risk perception as Europe’s deteriorated, says Rodríguez. Close to 180 accounts participated, mostly in Europe, some of them new to the sovereign. “It was very important to get this first transaction very well distributed,” says Rodríguez. Rodríguez says the recent political violence in Mexico was not a factor for European investors. “The investor community understands well that this is a very concentrated phenomenon, in only a few cities . . . It has not been a relevant issue for investors to make the decision whether to invest in Mexican bonds,” he adds. “It’s pretty attractive,” says a US-based investor who participated, estimating the pickup versus the comparable fiveyear at around 30 basis points. BNP Paribas, Barclays and Deutsche were joint books. Mexico picked three underwriters to ensure as wide distribution as

Mexico has opened up a new funding option in euros and is also eyeing yen. International investors appear undeterred by the uptick in drug violence.
possible. Mexico’s previous euro deal, in June 2005, was for €750m in a 10-year with a 4.25% coupon.

Shunning Sterling

Mexico continues diversifying its funding base to keep options open and take pressure off the local market. It is still pursuing yen, but unlikely to tap sterling, says Rodríguez. “Sterling is more of a niche market, it’s not as broad of a market as the European,” says the official. “It is more a corporate type of market than a market for sovereigns. We see more room for example for Pemex to tap into that market rather than ourselves,” he adds. América Móvil in June priced a £650 million 2030 at 99.003, with a 5.750% coupon, to yield 5.836%. This equates to gilts plus 165 basis points, the tight end of 165-175 basis points guidance, on orders of £1.3 billion. A banker familiar with the UK market says it is not attractive versus other options. “Sterling has traded fairly wide of dollars, making it a challenge to execute,” says the banker. “Mexico wants to develop markets that it can come to on a regular basis,” he adds. Rodríguez says yen and euros are the top priorities for Mexico. For yen, general risk appetite is still at a level where BBB issuers need a JBIC guarantee to issue bonds in Japan. “We’ve been keen on developing the yen market as a source of funding on a non-guaranteed basis, but it’s going to require a bit longer period of market stability for that to be available to triple B issuers,” says Rodríguez. With JBIC having renewed its guarantee program, the official says Mexico plans to go ahead with a sale in Japan in the next few months similar to its ¥150 billion December 2009 offer. With continued market stability, conditions may be ripe for nonguaranteed issuance as soon as next year, Rodríguez adds. LF

UPDATE
For daily news on Mexico’s local and international debt issuance, see www.latinfinance.com

90 LatinFinance

September/October 2010

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Latin Finance - September/October 2010

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