Mexico breaks new ground with 100-year sterling bond

Fri Mar 14, 2014 1:18pm EDT

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NEW YORK, March 14 (IFR) - With a new Single A rating under its belt, Mexico (rated A3/BBB+/BBB+) opened up new funding territory last Tuesday, when it printed a rare century bond in sterling, raising £1bn (US$1.7bn) and, arguably, piercing its US dollar curve in the process.

The value of a 100-year has long been called into question but bankers broadly saw it as a successful diversification play for a Latin American country heading into the upper echelons of credit criteria.

"It is our first sterling transaction in almost 10 years and our first in the external markets since Moody's put us in a Single A category," Alejandro Diaz de Leon, the country's head of public credit, told IFR.

The deal marks the country's third 100-year issue - the first two came in US dollars - and follows closely in the footsteps of Electricite de France's century bond in January, when it became the first-ever issuer to go this far up the curve in sterling.

Ever since investors took a shine to EDF's 100-year paper, bankers have been furiously pitching the idea to qualified borrowers. These included Mexico, which was seen as one of the few, if not the only, LatAm sovereign ready and willing to test this tenor.

"The success of the EDF deal surprised a lot of people in terms of the strong demand and the size achieved," said Jonathan Brown, head of fixed-income syndicate, Europe at Barclays, which acted as lead, along with Goldman Sachs. "Everyone has been trying to find a way to replicate that trade and find issuers that would like to do that."

The Mexico trade stemmed, in part, from some reverse enquiries and was placed mostly with UK investors, some of whom were unable to take exposure to the Latin American country before this year's upgrade.

"It was important for us to go to a different pool of investors, dedicated long-term sterling," said Diaz de Leon. "We haven't gone to this market for quite some time."

Indeed, Mexico's last sterling deal took place as long ago as 2004, when it sold a 6.75% 2024 issue through Barclays and HSBC. At the time, it was rated Baa2/BBB-, but now, with one foot in the Single A universe, the country can throw a wider net among the buyside.

"[It is a] nice way to get diversification and not pay up," said a banker away from the deal.

Flat to dollars

Starting with talk in the 6% area, leads were able to revise guidance to 5.75% (plus/minus 0.125%) before pricing the issue at 97.834 with a 5.625% coupon to yield 5.75%, or 223.2bp over Gilts, on the back of £2bn-plus in demand.

At that level, rival bankers calculated an equivalent yield in dollars at anywhere between 5.841% and 6.10%. That put final pricing flat to 20bp inside a dollar curve where Mexico's century bond had been trading at 5.90% and bankers thought a new 100-year would be priced at 6% or more.

Ego-fuelled?

Yet while borrowers can certainly beat their chests at achieving century status, some bankers see little value in extending this far up the curve when a 30-year would suffice in capturing a similar group of investors and result in cheaper pricing.

"There has to be an element of ego to a century bond," said a banker away from the deal.

Similar comments prevailed when Mexico debuted a US$1bn century dollar bond in 2010 to coincide with the country's bicentennial celebrations. That deal was priced with a 5.75% coupon to yield 6.10%.

At the time, pricing was seen as overly generous for the minimal increase in duration from its existing 2040s, but placed against the 5.5% coupon seen on Mexico's 30-year print this January, such levels look attractive in retrospect, noted one banker.

"There is no way that 100-year money at thatcoupon is a bad thing for Mexico," said a senior banker away from sterling trade. "I really do believe that when you have the chance to extend your maturity profile at attractive levels, you should take it."

How much more Mexico paid for a century bond in sterling versus, say, a 30-year is largely a matter of conjecture given the country's long absence in this sector and the dearth of decent benchmarks.

Some compared it with higher-rated Mexican telco America Movil, which one banker thought could come with a new 30-year in sterling at around 5%. That would put the sovereign - which trades wide to America Movil in the euro market but tight to it in dollars - at a print around the same level or 75bp tighter than where the 100-year ended.

From an investor perspective, a 5.75% yield also represented a decent pick-up on the 5.20% secondary level on EDF's 100-year sterling issue and looked attractive versus the dollar market, where EDF and Mexico essentially trade flat to each other.

"It got a yield handle for EM buyers, too, and if it is well-bedded with real-money sterling accounts, why wouldn't you buy it [if you're an EM investor]?" asked the rival banker.

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