By Paul Kilby
NEW YORK, Aug 1 (IFR) - Mexico has room to tap the international bond markets one more time this year should opportunities arise, according to the country’s head of public credit.
So far this year, Mexico has raised about US$4bn through debt issuance in dollars, euros and most recently in yen. The sovereign came to Japan this week with a US$875m equivalent multi-tranche Samurai that further consolidated its presence in that market.
“Last year we did about US$5bn,” Alejandro Diaz de Leon told IFR. “This time around we are a bit below that number. We have some space to do something else if there is an appropriately attractive window. We will keep our eyes open if in the second half potentially attractive opportunities could materialize.”
The sovereign consistently entertains a variety of funding options, but given the limited amount it raises in the external markets each year, it tends to focus on its core currencies, namely dollars, euros and yen.
“For us there is additional value in consolidating our benchmarks to add liquidity to the three key markets,” said Diaz de Leon.
Mexico kicked off the year with a US$1.5bn tap of its 4.75% 2044s via Barclays and JPMorgan, reopening that bond in early January at 109.615 to yield 4.19%, or Treasuries plus 110bp.
It then returned to the euro market in April after a hiatus of more than two years, creating its largest benchmark in the sector - a 1.6bn euros 10-year - with the help of an intraday liability management operation to mop up illiquid bonds.
After this week’s yen trade — which helped Mexico assert its presence in Japan and further diversify its investor base — it appears that the dollar market may be the next target.
“In the euro market the liability management has already been done, and going forward we will keep an eye on how our dollar yield curve behaves,” Diaz de Leon said. “We will evaluate if there is a transaction or liability management exercise that could be useful.”
What exactly the sovereign might do in the dollar market is still a matter for debate, but creating a new 10-year benchmark is long overdue now that the 3.625% 2022s are looking a bit long in the tooth.
A long 10-year due 2024 would probably make sense as Mexico has few maturities that year, with the exception of 447m pounds in outstanding 6.75% notes.
Along that part of the curve, possible buyback or exchange targets include US$714m in outstanding 8% 2022s and US$339m of 11.5% 2026s.
With those bonds trading at high dollar prices of 131.50 and 168.00 respectively, investors in theory would be willing to swap them into a new bond priced closer to par, though holders of the 2026s may be reluctant sellers given the high coupon.
Nonetheless, the days of locking in historically tight rates may be gone forever despite UMS’s relative outperformance during the recent sell-off. On a new 10-year at least, it seems unlikely that it would achieve the 3.625% coupon on the existing 2022s.
When that bond was issued in late 2012, it marked the country’s smallest coupon ever along that part of the curve. It was trading yesterday at a G-spread of 135bp, or a yield of 3.69%. That’s considerably wider than the 2.54%, or 70bp T-spread, seen in January before US yields spiked on fears of Q/E withdrawal.
“There is no way the UMS could do a 10-year at 3 5/8s,” said a DCM banker. “Treasuries would have to rally by 10bp and they would have to issue with no new issue premium.”
A long-end trade is certainly out of the question. Not only would it be comparatively expensive - the 2044s are now trading at a 5.36% yield, or G spread of 171bp - but at a 90.9 dollar price the instrument is well below OID thresholds.
Indeed, the government has already responded to a steepening yield curve by cutting the amount of longer-dated, fixed-rate bonds it issues in the local market. The implications are that it will do the same in the external market.
“Going forward we are likely to see a yield curve in the US whose steepness will reflect the stronger recovery and that will translate into other yield curves linked to the dollar,” said Diaz de Leon.
“At the end of the day if the yield curve steepens it is more expensive to issue a larger size with a longer-dated tenor.”