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DEAL OF THE YEAR: Sovereign Issuer/Sovereign Bond

Jan 1, 2013

The past year will not be remembered as the most active for sovereign issuance in Latin America: the region's major borrowers have increasingly eschewed external capital raising in favor of liability management.

Yet over this period, Mexico has once more established its position as Latin America's most sophisticated borrower - not least via four key transactions in 2012.

As Alejandro Díaz de León, the country's head of public credit, puts it: "Last year was very important in terms of issuance."

Over the course of the year, he notes, the sovereign added two key points in its yield curve, undertook a key liability management exercise and also issued a first-of-its-kind Samurai bond without a JBIC guarantee.

UMS sold a new $2 billion 10-year benchmark last January and landed its lowest coupon ever, despite competing supply and the fact that UMS had not been in the market with a 10-year bond since February 2011. Emerging with whispers of 180 basis points over Treasuries, the borrower eventually launched a larger-than-expected $2 billion deal at a tighter 175 basis points, and priced at 99.322 with a 3.625% coupon to yield 3.706%.

The sovereign attracted a $5 billion book, and the extra cost of pricing a new benchmark bond and the larger $2 billion size - one of the biggest ever trades for UMS - was seen justifying the extra spread. Deutsche Bank and Morgan Stanley managed the transaction.

A few months later, UMS priced an impressive liquid $2 billion 32-year benchmark. The 4.750% coupon represents what the sovereign says is a new low for Mexican bonds and for LatAm dollar-denominated bonds at that portion of the curve.

The deal, winner of LatinFinance's best sovereign bond award, represented the issuer's first ever bond with a 32-year maturity, demonstrating forward thinking.

The 2044 issue created a liquid benchmark providing UMS with the opportunity to re-tap over the next few years and creating a lasting benchmark for other Mexican issuers. The lowest coupon and yield at the long end of the curve were also firsts, not to mention a solid 10 basis point concession over its curve-adjusted secondary levels pre-announcement. The deal attracted a $6.5 billion book from approximately 285 accounts. Citi and HSBC managed the transaction.

In June, Mexico became the first BBB rated borrower to issue a Samurai bond without JBIC support, placing ¥80 billion ($1 billion) in three and five-year bonds in the Japanese market. Japanese investors were first sounded out for the deal in August 2011.

The sovereign priced ¥50 billion in 2015 bonds at par with a 1.29% coupon, to yield yen Libor plus 89 basis points, and ¥30 billion in 2017s at par with a 1.56% coupon, to yield yen Libor plus 110 basis points. Each part landed at the tight end of price thoughts of yen Libor plus 80 basis points to 100 basis points for the 2015 and 100 basis points for the 2013. Mexico had until then sought longer maturities but with the aid of a JBIC guarantee, most recently selling ¥150 billion in of 10-year bonds at a 1.51% yield, or yen Libor plus 50 basis points, in October 2010. Citi, Mitsubishi UFJ-Morgan Stanley, Nomura and SMBC Nikko managed the transaction.

The year's activity ended in August, before the new administration took office, when the sovereign sought to address the still-large 10 and 30-year benchmarks that the 2012 dollar issuance had replaced. The $2.2 billion exchange of off-the-run securities steered buyers into re-openings of the new benchmark 2022s and 2044s issued in 2012, and also the 2110 century bonds. It was the first liability management exercise that included a 100-year bond.

"Our new benchmarks had to be large and of meaningful size as investors value liquidity," Díaz de León says. "We wanted to exchange off-the-run bonds in exchange for three of the newest and most relevant on-the-run bonds - our 2022s, 2044s and our century bonds."

The offer was based on a modified Dutch auction was open for four days. Mexico targeted six series of outstanding notes due 2013-2017 representing $10.4 billion, and nine series due 2019-2040 totaling $18.6 billion outstanding, resulting in 36 possible exchange combinations. Holders received new bonds at a specific ratio plus a possible cash consideration, both varying depending on which specific securities are involved. Bank of America Merrill Lynch, Credit Suisse and Goldman Sachs managed the transaction.

Together, the four transactions serve as a reminder of why Mexico has long been considered the region's top government borrower and why it will be hard to displace it in that role - even as the sovereign faces mounting competition from an ever larger pool of investment-grade countries across the region. LF



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