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DEAL OF THE YEAR: Corporate Issuer, Local Currency Financing, Trade Financing

Jan 1, 2013

Mexico's state-owned oil producer, Pemex, has long enjoyed one of the largest followings in the dollar market among LatAm issuers. In 2012, it took advantage of the country's improving economic outlook, while providing emerging market investors and crossover buyers around the world with access to the Mexican story.

With an expansive capital expenditure programme targeted at exploration and oil production, Pemex has had to make frequent visits to the debt capital markets while looking for novel ways to tap sources of funding that offer cost savings versus dollars.

It capped off the final months of 2011 with the region's first cross-border bond sale in more than a month, making an opportunistic retap of its 6.5% 2041 bonds that allowed it to raise $1.25 billion. The state-owned oil producer with the support of a $300 million reverse-inquiry priced at the tight end of the US Treasuries plus 320 basis points guidance, to yield 6.339%. BNP Paribas and Deutsche Bank managed the sale.

In April, Pemex became the first Latin American credit to issue a bond in Australian dollars, which had been discussed as a possible pool of liquidity by other borrowers in the region. The state oil company raised A$150 million ($156 million) priced at 99.715, with a 6.125% coupon, to yield 6.193%, or mid-swaps plus 195 basis points, the tight end of mid-swaps plus 195-200 basis points guidance, and was seen pricing at 25 basis points inside Pemex's dollar curve. HSBC managed the transaction.

The deal followed a 300 million Swiss franc ($326 million) transaction in March 2012 which priced at 100.823 with a 2.5% coupon to yield 2.371%. Credit Suisse managed the sale, its fifth ever in the currency and first in two years. Pemex has been one of the region's most active borrowers in currencies other than dollars, and 2013 should be no different.

"We would certainly look at the euro[-denominated] market as we do every year and we would look at some currencies in Latin America," says Mauricio Alazraki, Pemex's treasury director. "The swap to dollars makes it difficult to structure those trades, but Pemex could turn to South American currencies such as Peru or Colombia which might make sense in our funding program."

Pemex later returned to the dollar market during a positive market environment in June following the Greek elections. A $1.75 billion 32-year bond mimicked the Mexican sovereign in providing a long-dated security that can be retapped for two more years, getting a 5.50% coupon that was one of the lowest-ever for a LatAm corporate long bond. It priced at 99.552 to yield 5.53%, or US Treasuries plus 280 basis points, with investors coming in for $6 billion.

It later took advantage of market conditions to add $1 billion to the 2044 in October, to the tune of more than $3 billion in orders, as it brought the yield down to 4.824%. Barclays, JPMorgan and Santander managed the first sale, and Deutsche Bank, Goldman Sachs and HSBC the retap. An additional retap this year is possible, Alazraki says.

Taking pesos global

The Mexican sovereign has long appealed to bond investors for the ease with which they can access their local curve in addition to buying internationally registered bonds. It was only a matter of time until the country's top corporate joined the fray.

Following the Peruvian issuance of global depositary notes (GDNs) offering international buyers access to local currency bonds, Pemex became the region's first - as well as the world's first - corporate to use the structure. In December 2011, it sold 10 billion pesos ($734 million) in 10-year notes, doubling the intended size after receiving 13 billion pesos in orders.

In addition to matching its largest ever peso-denominated size to date, the 7.65% yield meant an Mbonos plus 135 basis point spread in line with its local curve.

It was Pemex's largest ever single tranche local deal and at the time the lowest-ever fixed rate pricing, according to Morgan Stanley, the structuring agent, and bookrunner along with HSBC and Santander.

Pemex launched the deal on a Wednesday afternoon in the US to incorporate international demand, before opening books in Mexico on Thursday to account for the local demand. At least 60% of participation came from foreign investors who generated about 5 billion pesos in demand for the 144a/RegS GDNs, with another 8 billion pesos coming from locals for the GDN's underlying certificados bursátiles.

Similar to an ADR for equities, a GDN is a negotiable international instrument issued through a depositary bank evidencing ownership of a local debt instrument, allowing international investors to participate in the local debt markets. It is settled through DTC, Euroclear and Clearstream, eliminating the arbitrage problem of having two local curves.

The GDNs can be exchanged for the underlying securities at any time, and trade, settle, and pay in dollars linked to pesos. Alazraki says Pemex would like to tap the domestic market more frequently, likely with the GDNs. However, the titulos de crédito extranjeros securities inaugurated by América Móvil in November offer another way to place local debt with foreign buyers without the need for two separate securities.

"Titulos de crédito extranjeros is a great program and we have to see if that is a way to go or to work on our GDN format and provide it with more liquidity," says Alazraki. "There are similarities in terms of documentation. One of the advantages of the GDN is that it is easier to identify the amount to withhold. Obviously what América Móvil did was a great transaction."

Ex-Im first

Pemex has also turned to the US market for additional funding diversity, as well as rock-bottom costs. The $1.2 billion it issued under a program guaranteed by the US Export-Import Bank was the first time a LatAm issuer had issued such a bond for purposes outside of aviation funding.

The first transaction in June was increased to $400 million from an expected $250 million and oversubscribed more than two times, with asset managers and insurance companies leading the demand. The issuer got a 2.0% coupon and yield for the 2022. Its previous 10-year dollar bond had come at 4.98% in January.

The strong reception moved the state-owned oil company issue to again two days later, raising another $400 million. The second deal tightened the cost to 1.95%

In the first June deal, 45% of the investors were new to Ex-Im bonds, with the rest repeat accounts. The next series saw 77% overlap with accounts invested in the first series. Most of the demand came from asset managers, banks and insurance companies. Crédit Agricole, Goldman Sachs and JPMorgan managed the two sales.

"Pemex was the first of its kind," says Jia Shan, vice president of EM DCM at Goldman Sachs. Shan says the series of deals saved Pemex money, versus taking out a direct loan from the Ex-Im Bank.

Pemex finished off the $1.2 billion program with another $400 million sale in July. The deal got a 1.70% coupon and counted on about 84% of the June buyers. Proceeds were earmarked for payments for US goods and services imports Pemex and its subsidiaries buy from US suppliers.

Pemex had raised $6.03 billion through December of last year. It capped off its borrowing by raising 25 billion pesos ($1.92 billion) in Mexico's domestic bond market, in a three-tranche offering that was the issuer's, and possibly the country's, largest-ever domestic sale.

A 11.5 billion peso 2017 floating-rate bond priced at TIIE plus 18 basis points and drew 1.5 times demand. A 10 billion peso reopening of the 7.65%-coupon 2021 fixed-rate bonds came at a 6.52% yield, and attracting 1.5 times demand. The retap doubles the outstanding size of the bonds sold in the GDN offering. The issuer elected not to offer the bonds to international buyers this time. Finally, it issued a 3.5 billion peso 2028 UDI-denominated tranche paid 3.02%. Banamex, BBVA Bancomer, HSBC and Santander managed.

Pemex has set a target of borrowing $9.8 billion for 2013, though that remained to be approved as of mid-December. If approved at this level, the state-owned oil company plans to borrow about $4 billion internationally, mainly through the US dollar market, though it will also watch euros, Swiss francs and other currencies for opportunistic taps. A retap of the 2044s and returns to GDNs or Ex-Im funding are likely. On the domestic side, between $2.5 billion and $3.5 billion-equivalent is likely. LF



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