AWARDS: Sovereign Issuer & Sovereign Bond of the Year

From efficient liability management to breaking ground in the euro market and pioneering new documentation for Latin American sovereign issuers, the United Mexican States shone brightly for its work in the debt capital markets.

In the year ending September 30, 2015, Mexico rose above its competitors to receive the award for sovereign bond issuer of the year in Latin America for the second consecutive year.

Mexico faced tough competition for the award, especially from Peru, which issued four bonds during the awards period. The active Andean sovereign executed three Peruvian soles transactions and a dollar bond in August, a typically difficult time to get deals done.

Nonetheless, Mexico’s bond issues, including its century bond in euros, which wins LatinFinance’s Deal of the Year for a sovereign bond, demonstrated remarkable innovation and set precedents for future sovereign borrowing in the region. The head of Mexico’s public credit officer during the award period, Alejandro Díaz de León, says that the country sought to raise dollars first to anticipate volatility around a possible interest rate rise from the US Federal Reserve.

“That’s why we launched an issue of external debt in November with the objective and goal in mind to do some prefunding for 2015,” he says.

In November, the A3/BBB+/BBB+ rated sovereign hit the dollar market with a 3.6% $2 billion 2025 note, adding a new style of collective action clause. The new documentation followed recommendations by the IMF and International Capital Markets Association, allowing a restructuring plan agreed with at least 75% of bondholders to become binding for all creditors.

“Given that we see our presence in international markets as a permanent one, we always want to be involved and engaged at the best terms and conditions, and the best contractual language that we can put in our bonds,” Díaz de León says.

“We had been involved with different groups and key players that were discussing the lessons learned from the debt restructuring of Argentina and its litigation, and also the restructuring in Greece. From those, we found that there were some improvements that could be incorporated in our debt contract.”

The country returned to the dollar bond market in January, adding $500 million to its 2025 notes and issuing a new $1.5 billion 2046 bond. The sovereign offered existing bondholders to switch into the new paper. The longer tenor note carried an interest rate of 4.6%, the country’s lowest coupon in that currency.

After fulfilling its dollar financing through 2016, the sovereign went after euros. In February, Mexico raised €2.5bn in 2024 and 2045 notes, becoming the first non-European sovereign to sell a 30-year bond in the currency.

With a larger-than-expected fresh round of quantitative easing by the European Central Bank and a large reverse inquiry from European investors, Mexico went back to the euro market, this time with a century bond.

“The debate about the potential for QE in Europe had been talked about for months, but clearly the size and details of the announcement by the ECB were stronger than anticipated by the market,” says Díaz de León. The 4% €1.5 billion 100-year bond yielded 4.2% at the time of issue. Joint bookrunners Goldman Sachs and HSBC dropped pricing from the 4.5% area, equating to a spread that was 100 basis points tighter than Mexico’s 100-year dollar bond issued in October 2010.

German investors bought most of the note, with 36% of the allocation, followed by the UK with 29%, and the US with 28%. Fund managers took more than 70% of the instrument, while other entities, including pension funds, insurance companies and mutual funds took the rest. The century bond was Mexico’s third, following issuances in dollars and pounds.

“It is not easy to issue a 100-year bond. One of the prerequisites is that you are a frequent issuer in the market in which you want to go with the ultra-long tenor,” says Díaz de León.

“First, you need to have a regular presence in the market and develop your yield curve. Second, you need a strong credit and a good outlook so that you can appeal to investors that see value in buying that security and that they know, or their expectation is, that you are in a strong credit.”

Díaz de León, who was replaced by Alberto Torres García in November, says the euro market will likely provide better rates for Mexico and other borrowers because of the impending rate hike from the US Federal Reserve.

“We continue to see a divergence of monetary policy in Europe vis-á-vis the US. I think this will continue to offer funding opportunities in the euro market.”

Looking ahead, Díaz de León, now chief of Mexican export credit agency Bancomext, says that while Mexico did not visit the Japanese market for funding this year, it will look for opportunities for Yen.

“We think it is important for us to do that on a frequent basis. It’s important to keep and maintain that market open for us. This is clearly one of things we have on the radar screen.” LF

WINNER: United Mexican States