America Movil peso bond sets record

Fri Nov 30, 2012 4:45pm EST

NEW YORK, Nov 30 (IFR) - America Movil broke new ground this week with a Mexican peso bond designed to appeal to a broader group of local and foreign investors.

The deal was the largest corporate cross-border local currency trade out of Latin America, generating a book of close to US$4bn equivalent. More such deals are now on the horizon.

"It is the largest order book for local currency corporate debt ever out of Latin America," said Carlos Mendoza, co-head of LatAm debt capital markets at Deutsche Bank, which acted as active bookrunner along with Morgan Stanley and HSBC.

"We have never seen such a broad scope of investors for a product like this."

The Ps15bn (US$1.2bn) 10-year bond was neither a global depositary note nor a pure europeso.

It was an altogether different beast for the LatAm corporate world, and may offer an elegant solution to the difficulties bankers have had in creating a local currency instrument that is large and liquid enough to appeal to both foreign and domestic accounts.

The structure combined several features that broadened its appeal beyond the handful of investors who have typically participated in europeso bonds or global depositary notes, which are both designed to give foreign investors exposure to local currency plays.

This bond was registered with both the SEC and local regulators and could be settled through Euroclear and Mexico's Indeval, while also being denominated and payable in pesos.

"All previous local currency deals have bifurcated the investor base between offshore and onshore investors," said Dennis Eisele, director, head of EM syndicate at Deutsche Bank. "This format was more palatable for investors."

After years of tapping hard-currency assets to fund the merger with Telmex and other acquisitions, America Movil's percentage of outstanding peso debt is relatively small.

"We have wanted to re-balance our funding mix to have more outright peso funding as opposed to raising dollars and swapping into pesos," said the company's CFO, Carlos Garcia Moreno.

As of the end of September, about 51% of the US$31.8bn in total debt was funded in dollars, 15% in euros, 10% in sterling, 3% in various local currencies such as Chilean pesos, and 5% in other hard currencies such as yen and Swiss francs. That leaves about 16% in Mexico pesos.

Garcia Moreno said he hopes to change that balance so that about one-third comes from dollars and another third takes the form of peso debt, with other currencies making up the rest.

Local markets, global depositary notes and standard europeso transactions are too small and illiquid to have a wide appeal among global buyside accounts. By establishing a Ps100bn program that it will tap on a regular basis, America Movil has faced the liquidity dilemma head on.

The company plans to tap the bonds on a quarterly basis and create a new 10-year benchmark every two years, with each point in the curve ultimately being anywhere between US$2bn and US$3bn in size. The fact that the bonds are denominated and settled in pesos, not to mention clearable through Mexico's Indeval and Clearstream, should facilitate the process.

The structure is unique in this asset class. Europesos, for instance, are denominated in pesos but payable and settled in dollars, complicating the trading process.

To ensure that the bonds are liquid and can be traded 24/7, the company has engaged with six banks from around the world to be market-makers in the debt - Deutsche Bank, Credit Suisse, Morgan Stanley, Citigroup, HSBC and BBVA.

"They have committed capital and have a clear understanding of what is expected of them," said Garcia Moreno.

By being registered with the local CNBV and the SEC, the bonds also qualified for inclusion in the portfolios of investors that couldn't necessarily participate in europeso or GDN offerings.

Whether or not a string of issuers will follow is unclear given America Movil's credit standing, but bankers are hoping that at least the bond will act as a new pricing gauge in Mexico.

It is thought that state-owned Pemex may be constrained on competitive pressures with the sovereign, but a handful of blue-chip corporates could eventually try their luck.

"Mexican issuers now have a reference point to price off," said one banker.

"They may not issue as much volume as America Movil, but they can facilitate more efficient pricing and set up an alternative to having to rely on eight pension funds that talk to each other and determine the price."

For the foreign real-money accounts that have already gained significant exposure to the sovereign through Mbonos, this was a way to diversify their holdings in pesos. Indeed, America Movil was able to take advantage of the mounting interest in Mexico as an improving credit story and the relatively high comfort levels with the pesos versus other BRIC currencies.

Bankers now want to harness already-strong foreign support for Mexican Treasuries and move that demand into the credit market for corporate issuers, including infrastructure projects.

In the past, filing such a deal with local authorities has been an arduous process, but some of the regulatory hurdles have simplified, with the elimination, for instance, of the requirement for a full Spanish prospectus.

"It took a lot of support from the banking commission. They have been working to streamline the process. They were trying to make it less cumbersome and reduce the time to market," said Garcia Moreno.

A2/A-/A rated America Movil may be an ideal candidate to get the ball rolling, as it takes away some of the complications of local currency trades for foreign investors who, on this occasion, can put aside credit concerns and focus exclusively on interest rate and forex risks.

In the end, the borrower was able to price at 99.989 with a coupon and yield of 6.45%, or Mbonos plus 93bp, coming tight to guidance of plus 95bp area and well inside the low 100 whispers heard earlier.

That was inside the 110bp that Pemex achieved on a recent reopening of its local 10-year bond, or indeed the 135bp seen when the oil company priced its GDN in December last year, albeit wide to the 39bp that trade development bank Bancomext got on its 10-year in July.

"You pick up over half a percentage point by buying this new deal against buying the company's dollar debt and swapping back into pesos," said Steven Landis, managing director at FH International Asset Management.

"The 10-year dollar bond is trading at around 120bp over Treasuries, and this is only 93bp over Mbonos, but I think people would rather compare this to the dollar debt swapped into pesos. From that point of view it is attractive."

About 35% of the paper was placed in Latin America, which included Mexican investors but also accounts in Chile, Peru and Brazil. Another 56% went to the US, and 9% in Europe.

The company decided against exercising the up to 15% greenshoe in Asian hours, as many investors saw their allocations cut considerably or didn't get any paper at all.

"We weren't comfortable with that," Garcia Moreno said. "Why (should) Asia get filled and others don't? Some accounts were placing orders through Asia, and that is not what we had intended."

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