“Hola amigos, remember that $6bn you lent us to build a new airport? Change of plans: we’re not building it. Would you be so kind as to give this the OK? Oh yes, we’ll take some of that debt off your hands too — you’re not fussed if it’s below face value, right?”
Bondholders of Mexico City Airport Trust (Mexcat) are probably right to feel betrayed. They bought into the largest, most modern airport in Latin America, and could even boast to their investors that it was the world’s first “green” airport — carbon-neutral, apparently. (We assume actual planes taking off and landing weren’t included in this calculation.)
This mega project, and the promised increased cash flow from more passengers, are no more, thanks to an October 29 decision from new president Andrés Manuel López Obrador (Amlo). The new government further annoyed bondholders with an initial tender offer and consent solicitation that asked creditors to give up the very covenants they enjoyed to protect themselves against events of exactly this nature.
Bruised creditors immediately expressed their disapproval. But rather than dwell on the apparent botched nature of the government’s attempts to solve the issue, investors in Mexico should be encouraged by both Amlo’s swift initial move and vastly improved follow-up proposal.
Left wing Amlo was never going to curry favour with markets as did his predecessor, and there was never going to be a rosy ending to the decision to cancel such a project. Mexican assets have sold off accordingly.
However, remember that upon cancelling the airport, Amlo was simply following through on a promise made many times during his campaign. The good news is that the president also pledged to maintain fiscal discipline and central bank independence — if he does this, it is hard for his government to push Mexico too far off the path that has made it a bond market favourite for several years.
Furthermore, the appearance of the tender offer and consent solicitation is encouraging, even if the details leave a lot to be desired.
The government could not have moved any faster — Mexcat launched the tender on Amlo’s first business day in office. The president clearly understands that he needs bondholders onside.
Moreover, though the government has shown it is perhaps naïve about what it can ask of investors it has entered into contracts with, it has been decisive in communicating new terms and negotiating.
The government’s swift actions show that it is, at least, astute enough to be concerned about the borrowing costs of the sovereign and Pemex, which will have to tap bond markets for every year of this administration.
Amlo’s government has a big agenda of change that even some bond investors privately admit could be positive for Mexico. Perhaps an early tiff with bond markets is not a bad thing — the government knows it needs them onside to carry out its programme and has to learn quickly how to keep them satisfied.
Therefore, though Amlo’s first attempt to engage with financial markets is looking tense, it could teach the government lessons in dealing with investors that might be highly valuable when it is tackling issues more vital to the economic workings of the country, such as energy reform.