Having wrapped up its external financing needs for 2017 in October last year, Mexico’s cross-border activity this year has been limited to liability management transactions that do not hinder its attempts to arrest a rising debt-to-GDP ratio.
In March, the sovereign highlighted the debt-neutral nature of a $3.15bn 10 year issue, its last bond market outing. And Alberto Torres, director of public credit, highlighted the same aspect of the trade on Monday when speaking to GlobalCapital.
“Our debt strategy is consistent with the government’s fiscal consolidation strategy,” Torres told GlobalCapital. “Our main objective in bond markets is therefore to improve the government’s debt profile, at the same time as ensuring that we do not increase the level of debt.”
Proceeds from Monday’s issuance will be used to repay existing bonds due in 2020. It will also lower the average cost of the sovereign’s debt, given the coupon on the new 2048s is lower than the 5.125% on the 2020s.
Mexico’s fiscal consolidation has come at a prudent time, allowing the government to rid itself of negative outlooks from S&P and Fitch despite worries earlier in the year about the impact that Donald Trump’s US presidency could have on the economy.
And spreads over US Treasuries in Mexico’s dollar curve have rallied in response. They reached their lowest levels in three years on Friday, prompting the government to decide that this was the moment to return to market.
A3/BBB+/BBB+ rated Mexico announced initial price thoughts of 195bp over US Treasuries for its planned February 2048s, offering a slight pick-up to its existing January 2047s, which were trading at around 170bp over.
Torres revealed that Mexico had noticed strong demand for recent 30 year bond issues from EM sovereigns — in particular Saudi Arabia, which came last week — giving them confident that the latest bond would find a good reception. At $8.1bn and with orders from more than 300 investors, the book size was the largest ever for a Mexican bond issue, the public credit director said.
Negative concession
This provoked something of an exodus from the order book, with drop-outs leaving orders just below $5bn, according to one banker close to the trade.
“Moving guidance to 175bp would have made the market think the issuer was about to go even tighter, which explains the drop-outs,” said one head of Lat Am DCM away from the deal. “My analyst had fair value at 180bp so it’s still incredibly tight.
“Investors want paper but interest rates are rising and they are getting tired of zero new issue concessions.”
Indeed, Mexico opted not to push for the extra 5bp and launched the deal at 175bp over.
“We thought there was a chance we could get the spread down to 170bp, based on the strength of the book, so we owed it to the issuer to try,” said the banker close to the deal. “We wanted to push the market.
“But this is a borrower that has the respect of the market place because it has not squeezed every basis point out of new deals, and investors were clear that they wanted 175bp.”
The new 2048s were slightly above par in the grey market on Monday afternoon, suggesting that Mexico had made the right decision. Recently, several EM sovereign deals, including those from Ukraine and South Africa, have traded poorly in the aftermarket.
“When a name as strong as Mexico comes in this market you know you will end up pretty close to pre-announcement levels,” said one EM bond portfolio manager. “You also know that it will not pop several points in secondary.
“But we participated: we like [Mexico] and this was a nice way to top up our exposure.”
The investor said that Mexico's pricing still looked attractive for a triple-B rated name.
“It was underperforming big time coming into 2017 but has done really well this year,” he said. “You can’t completely dismiss the risks from Trump and the Nafta negotiations, but we feel rationality will prevail.
“Moreover, Mexico has managed the situation very well both on the fiscal and external side.”
Mexican assets — both in bond spreads and the peso — suffered a hefty sell-off in November last year when Donald Trump won the US presidency after making several threats against the southern neighbours. But such has been the rally in bond prices that Mexico’s dollar bonds are around 15bp-20bp inside where they were before last year’s elections.
“We feel that investors’ perceptions of Mexico have improved considerably during the year,” said Torres of the public credit office. “As shown by the spreads, investors are seeing the resilient economic activity and strong financial markets and have maintained — or in some cases increased — their position in Mexican bonds, both locally and internationally.
“Furthermore, we are also seeing more interest in FDI investments in the real economy.”