Mexican issuers face uncertainty

Mexican issuers face uncertainty

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Mexican bond issuers, looking to steer clear of uncertainty from the presidential election later this year, navigated choppy markets in the first few months of 2018 and vigorously tapped the local and international debt markets.

A flurry of bond issues came as Mexican companies braced for what are expected to be volatile weeks ahead, with the July 1 presidential vote drawing near and talks over the future of the North American Free Trade Agreement (NAFTA) intensifying.

The early months of 2018 offered Mexican companies a chance to lock in financing at reasonable rates, despite occasional ripples of volatility, as investors bet on Mexico’s improving economic conditions and that a NAFTA deal would eventually be reached.

For some investors, heading into the political and economic turbulence in an election year has put an even more intense focus on gaming out potential outcomes. Polls put the leftist candidate Andrés Manuel López Obrador with a double-digit lead in the presidential race, and a conclusion to the NAFTA talks remains elusive.

"We think there are many corporates that will do just fine even in a worst-case scenario of NAFTA," says Darin Batchman, an emerging markets corporate debt portfolio manager at Stone Harbor Investment Partners.

"We try to not to take too much of an extreme view on how things are going to play out, but a view on companies that we think we can bet on regardless of the outcome," he says.

Batchman was among a group of investors, Mexican business leaders and government officials who participated in LatinFinance’s recent 2018 Mexico Roundtable in Mexico City to examine the political, economic and financing outlook in Latin America’s second-largest economy.

AMLO’s contradictions
Analysts are divided over the possible implications of the rise of López Obrador, the former mayor of Mexico City mayor who is commonly known as AMLO. The candidate's criticism of Mexico’s economic reforms have sparked fears he might roll back the market-minded changes, particularly in the energy sector. Others say there is little concrete evidence to suggest an AMLO victory would lead to economic upheaval.

Still, AMLO’s sizable lead in the polls, plus the topsy-turvy NAFTA negotiations, have led Mexican companies to prepare for possible turbulence as the election approaches. Jorge Sánchez-Lara, the head of corporate and investment banking at Deutsche Bank in Mexico, says many companies are "well-positioned" to withstand any potential volatility.

"Mexican corporates have acted responsibly," Sánchez-Lara says. "They are managing their debt needs for this year, understanding that this is going to be without a doubt a very volatile year. I think that speaks very well about how the Mexican market has matured."

A number of Mexican companies prefunded their financing needs in the second half of 2017 and early 2018 in anticipation of the election and NAFTA jitters.

"Everybody has been preparing for this," says Gerardo Vargas, CFO at Fibra Uno, Mexico’s largest real investment trust. "Refinancing needs or maturities this year, from the government to the corporate sector, are very, very small."

Fibra Uno completed debt and equity sales in late 2017, terming out debt and selling shares to leave just 1 billion pesos ($48.8 million) in maturing debt between now and 2020.

Vargas says the company, like others, generally prepares for political uncertainty during election years, but NAFTA had added an extra element.

"This time people were giving a higher weight to bad scenarios because of NAFTA negotiations," he says. "In assessing a bad outcome in NAFTA, there would be a potential impact on the financing side of the equation. It’s likely to be costly, so people were trying to prepare for those scenarios."

On the elections, Vargas says business leaders are still trying to determine if AMLO means all that he says on the campaign trail.

"He has sent all of these contradictory messages. So who is he really?" he asks. "López Obrador has often had a negative message about the business community. He’s now sending somewhat positive signs. So people are wondering, what is he going to mean for business? How is investment going to behave? That depends a lot on getting to know him and that will take time."

The long view
Sergio Forte Gómez, the deputy director general of infrastructure promotion at the national development bank Banobras, says he expects investors will take a long-term view of Mexico, particularly in the infrastructure sector, despite the political risk from the election.

"If we are talking about infrastructure, we cannot think simply about what is going to happen next year," he says. "Whoever is thinking about making an investment in infrastructure is not looking at the next three to five years. They’re looking at the next 20 to 25 years and they are looking at the fundamentals.

"The infrastructure that Mexico needs is the same as we needed one year or 10 years ago. We need to go forward, no matter who wins the elections," Forte Gómez says.

López Obrador has questioned at least one key infrastructure project, a $13 billion airport under construction in Mexico City, and even suggested at times that he would like to cancel it to save money. But he has also said he will respect the bondholders that have bought debt from Grupo Aeroportuario de la Ciudad de México (GACM), the government entity in charge of building the new airport.

GACM CFO Ricardo Dueñas says construction is moving ahead despite the noise on the campaign trail and the airport is expected to start operations in late 2020.

"We’re dealing with a project that has been studied for decades in Mexico," Dueñas says. "Cancelling a project like this would be very costly economically and politically."

GACM raised $1.6 billion in late March through a trust known as a Fibra-E. The airport operator has pulled some $10 billion in financing altogether, including $6 billion in bonds and a revolving credit line.

"There’s nothing worse for long-term planning than uncertainty, especially when you’re dealing with infrastructure," Dueñas says. "People are not against this project. This is a very visible project and that has a good side, but it also has a down side. A part of that is it serves as a way to attack the system."

With the election now weeks away, the rhetoric on the campaign trail is expected to heat up on all sides. Still, Fibra Uno’s Vargas underlines the importance of having prepared for this year’s election. For now, he says, the company is likely to avoid the market.

"We would only access the market if we saw a very attractive M&A opportunity," Vargas says. "Otherwise, I think we’re going to stay away, and it’s a very difficult to make the decision of what very attractive means." LF

LatinFinance Roundtables are underwritten by sponsors. The 2018 Mexico Roundtable was sponsored by Deutsche Bank. LatinFinance retains editorial control to ensure objectivity and independence.