INTERVIEW: Mexico goes for cash before bond market gets crowded
April 27, 2020 |
Sovereign's next sources of funding include multilateral credit lines and SDG bonds, deputy finance minister says
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Watching with growing alarm over several weeks at the rapid capital flight from Latin America and dramatic turn down in the global economy because of the COVID-19 pandemic, Mexico rewrote much of its 2020 financial playbook and came to the market with a massive $6 billion cross-border debt sale to shore up the economy, the nation's deputy finance minister told LatinFinance.
Mexico's decision was a tactical move made in response to a "dislocated" internal market and an eye on securing more liquidity to fight the pandemic before other countries sought to do the same, Gabriel Yorio said in a telephone interview following the sale. The risk for waiting too long was the possibility of too much issuance hitting a market just stirring back to life after weeks of inactivity, and overwhelming appetite for new debt.
Unprecedented capital outflows, a 6.6% economic contraction predicted for this year by the International Monetary Fund, and a currency devaluation of more than 20% have been some of the effects of COVID-19 on Mexico. However, Mexico's financial hedging program insulates it somewhat against the collapse of oil prices that have robbed many countries of their main source of income. Still, shoring up the state-run oil company Pemex has diverted resources away from the pandemic fight.
The Mexican peso has lost 24.1% in value against the US dollar Y-T-D
Mexico had already issued about $5 billion worth of cross-border bonds in January, and the country was planning to issue the rest of its 2020 authorized debt in the local market. But the volatility that followed investor flight to safety after the COVID-19 outbreak, forced the country to change strategies.
“When the volatility started, nobody was buying in the local market. Our market makers could not absorb our placements because their clients would not take them,” Yorio said.
So, the ministry of finance decided to “rebalance” the mix of local and international borrowing in its debt plan, and to go to the international market to get the resources the country needed to cover health and COVID-19 prevention measures, Yorio said.
The ministry had been looking for the opportunity to come to market as soon as possible.
“We wanted to come early to market because we knew that other issuers would be coming to market to fund their own stimulus packages, and this was going to increase demand for liquidity in the market,” he said. “But we had to wait for the markets to reopen.”
Though the issuance is one of the largest in the country’s history, it is still within what the government authorized for debt issuance in the 2020 budget.
“We are working under a ‘shallow v’ COVID-19 scenario,” said Yorio, “reassigning budget items with austerity adjustments, cutting trips and public servant salaries to fund protections for the self-employed and microentrepreneurs,” he said.
Yorio said the ministry was monitoring the impact of COVID-19 with high frequency data to gauge how deep it would be, adding that if the impact were to be a “deep v” or a “u” shape to economic activity, the ministry would implement a larger stimulus package and issue more debt.
“We have credit lines that give us a lot of cushion that we still have not used,” he said, explaining that the ministry’s next sources of funding would be a $61 billion flexible credit line that Mexico has with the IMF and a $2 billion credit line from the combined resources of the World Bank and the Inter-American Development Bank (IDB).
“Tapping them will require congressional approval for more debt,” he said.
In Wednesday’s risk averse environment, the $6 billion dollar sale was more expensive than the January issuances, Yorio said. “Our issuance concession started at 100 basis points when in normal times it starts at 30 or 40 basis points” he said. “But we managed to bring it down to 35 basis points. Plus, demand was high, reaching $28 billion.”
Yorio added that fixed interest rates on all the foreign debt and on 78% of the local debt, and the average 18-year maturity of the foreign debt, assured a solid debt portfolio and an “adequate risk profile.” The oil price hedging program was also securing the treasury with 80% to 85% of estimated income from oil in 2020, he said.
Mexico still plans to issue the sustainable development goal (SDG) bonds that had been on a roadshow in late February but whose coming to market was halted by the COVID-19 outbreak. “We would like to. The problem is that the Euro market is still closed,” Yorio said.
On April 22, Mexico sold $1 billion in new five-year notes, $2.5 billion in 22-year notes and $2.5 billion in 31-year year notes, with record-high demand for the longer notes.
It sold the debt at a discount across all three tranches, according a source familiar with the details of the transaction. The five-year notes sold at a spot price of 98.993 with a coupon of 3.9% and a yield of 4.125%, or 376 basis points over US Treasury notes, while the 12-year bonds priced at 97.764 with a coupon of 4.75% and a yield of 5%, or 438 basis points over Treasuries.
The 30-year paper priced at 92.6 with a coupon of 5% and a yield of 5.5%, the source said.
The bookrunners were Citi, Goldman Sachs, JPMorgan and Santander.
The bond deal came the same day that President Andrés Manuel López Obrador announced that the government will spend an additional MXN623 billion ($25.4 billion) to create 2 million jobs and to provide support 70% of Mexican families during the pandemic.
The IMF/World Bank World Economic Outlook forecast earlier this month sees Mexico's GDP rebounding to 3.0% in 2021. The Latin America and the Caribbean region's economy is expected to contract 5.2% this year before recovering with growth of 3.4% next ear.
(Photo by Natural Expressions NY - January 29, 2020 - LatinFinance Deals of the Year Awards - Kevin Gray, Deputy Editor of LatinFinance (L), Gabriel Yorio, Deputy Secretary of Finance, Galia Borja, Treasurer of Mexico, Daniel Bases (R), Managing Editor of LatinFinance.)