NEW YORK, Aug 4 (IFR) - An upsized US$700m 10-year non-call five bond from Mexico's Bancomext proved to be a hit on Thursday as yield-hungry investors piled into the Basel III-compliant Tier 2 note.
With order books swelling close to US$3.5bn by late morning, leads upped the size from US$500m and ratcheted in pricing 37bp before launching at a spread of 300bp over five-year Treasuries.
"There hasn't been a ton of Mexican bank paper, so there is scarcity value, and it has a government guarantee," said a syndicate manager away from the deal.
The state-owned entity's subordinated bond certainly meets the needs of investors looking to spruce up portfolios in a world of negative yields.
"People need to find yield and they are happy to take on more complex structures from a high-quality credit rather than go down the credit-quality spectrum," Jason Trujillo, an analyst at Invesco, told IFR.
For Bancomext, the deal helps diversify its funding base and hedges its capital ratio, which has mostly been denominated in pesos.
That is important for a trade bank whose loan portfolio is largely US dollar-denominated, especially as the peso has sunk about 9% against the greenback this year.
Basel III-compliant deals are already rare in Latin America, and the new offering lacks the write-down and write-off provisions typically found in such issues.
Those features made little sense as Bancomext enjoys an explicit sovereign guarantee enshrined in domestic law.
Because of that Fitch rated the deal just once notch below the bank's BBB+. It would normally push Basel III notes two notches down due to the more severe loss-absorption features.
While that arguably justified tighter spread levels, investors said the borrower should pay for the call option in year five when the fixed-rate coupon starts to float.
"It gives them some optionality and you want to get paid for that," said Trujillo.
Price discovery was tricky, given the lack of comps, and market participants were largely looking at senior to subordinated spread differentials on Latin American bank bonds.
That range has been anywhere between around 60bp and 140bp, and leads had been looking to the middle of that range.
Peruvian government-owned development bank Cofide's curve is at the tight end of that range, while large private banks in Mexico such as BBVA Bancomer are closer to the higher end.
At a final spread of 300bp, the deal comes some 120bp back of a theoretical senior five-year bond, which would likely price at around 183bp, Trujillo said.
Bancomext's senior 4.375% 2025s have been trading at a yield of around 3.6% or at G-spreads of about 219bp.
Joint bookrunners BBVA and Credit Suisse are expected to price the subordinated preferred capital notes later on Thursday. Ratings are Ba1/BBB by Moody's and Fitch. (Reporting by Paul Kilby; Editing by Marc Carnegie)