Buyside grapples with AMLO's decision to halt NAICM development

Buyside grapples with AMLO's decision to halt NAICM development

Capital Markets Bonds Project & Infrastructure Finance Mexico

President-elect Andrés Manuel López Obrador's decision to scrap development of the New International Airport of Mexico City (NAICM) has emerging market investors grappling with the reality - and precedent - set by AMLO after he called for a national referendum on the future of the airport last week.

His announcement to honor the result of the referendum, where 70% of just 1.07m people who participated voted against the new airport, sent the capital markets into a frenzy. The peso moved beyond MXN20 per dollar on Tuesday, giving up the gains it has made since AMLO's victory in the July 1 election.

NAICM's 2028s fell to roughly 80.5 cents on the dollar on Monday from 86.88 before the referendum started, sources have said. The airport trust's 2047s also fell to 80.95 cents from 84.4 and yield widened 16bp to almost 7%.

While investors largely anticipated the referendum's result, two that spoke to LatinFinance said they did not expect President-elect AMLO to take such a definite stance and announce the total cancellation of the project.

"AMLO is starting to show his true colors," one buyside source said of the leftist politician who claims the new airport was too expensive for Mexico.

Other investors questioned what the decision meant for the airport's bondholders and what it said about the political stability of the country.

An emerging markets strategist said despite the incoming administration creating a rift with investors, it does have an opportunity to salvage overall confidence in the Mexican market by agreeing to amend the concessions to include a portion of the Santa Lucia airport expansion or by merely paying the NAICM noteholders back at par.

“There is a large pool of EM investors that may not have participated in the initial financing because of the low coupon,” he said.

AMLO said in a news conference that Mexico had enough available funds to protect those that bought the $6bn worth of NAICM bonds. The President-elect also said he would not ask bondholders to take a haircut on the repayments.

An investor from New York said the government took a significant step in the wrong direction on Monday, adding that the announcement placed the future of the Santa Lucia expansion, along with frequent issuers like state-run oil company Pemex at risk.

"Pemex bondholders are naturally worried," a syndicate banker said, adding that the company's bonds were down three-to-four points across its curve.

Moody’s also downgraded the Mexico City Airport Trust to Baa3 from Baa1. The ratings agency said it has set the rating under review for further downgrades.

Located in Texcoco, Mexico City, the new airport was designed to replace Benito Juarez International Airport, one of the region's busiest transportation hubs. The consortium managing the construction of the new airport said it will continue with the project works until it received official notice to stop.

As an alternative, AMLO has proposed the construction of two new runways at the Santa Lucia military air base.