Investors often regard Telmex, Mexico’s dominant
telecommunications company, more as a high-grade issuer than just
another big emerging market player. They like its size, its
impressive track record and they are drawn in by the mystique of
Carlos Slim, its controlling shareholder and Latin America’s most
astute investor. In November, investors bought up a $1 billion,
five-year bond with a 4.5% coupon priced at a mere 115 basis points
over US Treasuries. The bond yields even less than the Mexican
government’s five-year bond. Bookrunners JP Morgan and CSFB placed
three-quarters of the issue with high-grade US investors, some of
whom had never bought Mexico before, let alone a Mexican
telecommunications company. Adolfo Cerezo, Telmex’s chief financial
officer, says the issue is further proof that Mexico – and
Telmex – are in a league of their own and are no longer true
emerging market assets.

Telmex is building on financial strength that most US telcos
would die for. Its borrowing costs have halved in just two years.
When Telmex last issued a $1 billion, five-year bond in 2001,
lead-managed by JP Morgan and Merrill Lynch, it had to pay an 8.25%
coupon. The bond had a spread at launch of 350 basis points over US
Treasuries. Telmex placed just a third of that issue with
high-grade accounts in the US. Says Cerezo, “When we launched the
2003 issue, we had no doubt of Telmex’s ability to qualify as an
investment grade company. Compare our numbers with any other
telecommunications company and our numbers are better in all cases.
But we had to convince the market.”

Telmex set out to do so by boldly announcing that the bond would
be a benchmark transaction, the terms of which are not announced
straight away. This strategy is typically reserved for blue-chip
companies that already have a broad base of investors in the
high-grade market. At 8:30 a.m. on November 12, the bookrunners
announced that Telmex was about to issue a benchmark bond, but gave
no details on size or pricing while they waited for the orders to
roll in.

At noon, bankers from JP Morgan and CSFB
told investors that Telmex wanted a $1 billion, five-year issue
with a 4.5% coupon priced between 115-120 basis points over
five-year US Treasuries. In the end they priced at 115 basis
points, one point below Mexico’s benchmark five-year bond.
José-Juan De Olloqui, a managing director at JP Morgan, says the
issue was oversubscribed soon after announcement even though the
bookrunners had provided no details on size or pricing. Cerezo
admits the strategy was “a bit ambitious for an emerging markets
company.” But the plan firmly established Telmex in the US
high-grade universe. In the days following the launch, the bond
tightened to 111 basis points. De Olloqui says this was a sign that
some investors “went back to the market to pick up some additional
paper.”

Demand for the bond topped out at around $4 billion. Says
Michael Schoen, head of Latin American debt capital markets at
CSFB, “One of the big issues in the high-grade market has been
spread compression in the triple-B sector. Telmex is an infrequent
borrower that gave investors good value for the money, compared to
frequent borrowers.” Investors picked up around 60 basis points
more by buying Telmex compared to US telecommunication company
Verizon, which paid 45 basis points over US Treasuries on its 2008
bond. De Olloqui says, “We were able to price flat to sovereign
Mexican spreads because we really sold the credit compared to US
and European telcos, rather than compared to Mexico.”

Telmex had no burning need to raise money. Hector Grise, a
managing director for CSFB in Mexico, says, “Telmex wanted to
access the US market at the lowest rates it could get when the
credit is very strong.” Telmex could not resist raising funds at
such temptingly cheap levels. Says Cerezo, “The best time to raise
cash is when you don’t need it. There was an opportunity in the
market to raise money at attractive levels, so we took advantage of
that.” Telmex will use the funds to finance next year’s capital
expenditure program, to help pay for its recent $207 million
acquisition of AT&T’s Latin American assets and for a share
buy-back program. Telmex, like other Mexican blue chips, has raised
funds in Mexico’s local bond market at lower levels than in dollars
in the last couple of years. However, the peso market is still
comparatively shallow. “Raising $1 billion in Mexico is impossible.
The last time we placed
certificados bursátiles there, we raised $350
million,” says Cerezo. LF