10 de abril de 2015 / 14:28 / en 3 años

Mexico scores century and hat-trick

NEW YORK, April 10 (IFR) - Mexico reached another milestone this week when it took advantage of prime borrowing conditions in Europe to become the first-ever sovereign to sell a euro-denominated Century bond.

The landmark EUR1.5bn trade was seen as an achievement for an emerging market country that is now in a unique position of being the only issuer in the world to have three 100-year bonds to its name.

A quantitative easing programme that has sent rates on many European government bonds into negative territory presented a perfect opportunity for the Latin American borrower, rated A2/BBB+/BBB+, as investors expressed a willingness to venture up the maturity curve in search of higher yields.

The announcement of the 100-year bond on Wednesday (through leads Goldman Sachs and HSBC) soon drew a crowd of European accounts, which found initial price thoughts of 4.50% hard to ignore, especially when 30-year German Bunds are trading at 0.63% and even troubled peripheral countries such as Triple B rated Spain are offering just 2% on long-term bonds.

“The ECB’s quantitative easing and the relatively low supply from EM provided a good backdrop for a transaction like this and we thought the levels (at which) we could print a centennial in euros were attractive,” said Alejandro Diaz de Leon, Mexico’s deputy under-secretary for public credit.

Nor did the deal go unnoticed among US investors, who comprised 28% of the final book after demand peaked at around EUR6.3bn. For them, however, the appeal lay in the comparatively wide spread differential between the country’s 30-year and 100-year bonds.

With Mexico’s existing euro-denominated 2045s yielding around 2.75%, the borrower was in effect offering 145bp to take further duration risk. That compares with a steepness of around 75bp along the sovereign’s US dollar curve, where the 5.75% 2110s and 5.55% 2045s were yielding 5.2% and 4.45%, respectively.

While bankers said the pricing had to take into account the extra duration risk for investors, US accounts still saw considerable value in the trade.

“There was still some value even if you adjust for duration,” said Sean Newman, a US-based senior portfolio manager at Invesco, who bought bonds. “(Earlier this week) we (were) also seeing a reprieve in the dollar’s strength and that erased fears there would be erosion in the value of euro debt.”

GOING CHEAP?

That the bonds leapt some six points to 101.50 on Thursday after the deal was priced at 95.322 to yield 4.2% left some bankers wondering whether it had come cheap, or at least questioning the logic of raising 100-year money when Mexico had a 30-year bond readily available to tap at lower rates.

“If you look at the euro swap curve, it is incredibly flat past 10 years and it is actually inverted between 30 and 50 years, so you are paying a lot for bragging rights,” said a banker away from the deal.

Still, set against the sovereign’s other Century offerings, the bonds’ 4% coupon looked low against the 5.75% rate on its dollar-denominated 2110s or even its more recently issued 5.625% sterling offering.

“From (Mexico‘s) perspective this was an opportunity to lock in quasi-permanent capital,” said Neil Slee, head of emerging market debt syndicate for Goldman Sachs in London. “From a yield perspective, at 4.2% they priced inside their 30-year US dollar curve and over 100bp inside their 100-year US dollar and sterling bonds.”

TAP CHAP

Diaz argues that the deal brought additional benefits, including access to a group of investors that would not necessarily have been at its disposition if it had sold 30-year paper.

Aside from a reduction in refinancing risks, the Century bond also gives the sovereign the option to quickly tap that part of the curve when appetite for duration is at its height.

“If you stick to 30-year bonds, you don’t have the option to tap under those particular circumstances when those extra-long instruments (are in demand),” Diaz said.

The sovereign’s mantra over the past few years has been diversification and Mexico’s recent forays into the euro market fit into that strategy.

And unlike with corporates, public credit does not necessarily swap back to dollars - at least not immediately - especially at a time when the Mexican peso has in fact been strengthening against the euro.

Year to-date, the peso has climbed close to 10% against the euro. That stands in contrast to the 7.45% decline against the US dollar over the same period.

“Over the last year, our unhedged exposure to the yen and the euro have worked well and offset the strength in the dollar,” Diaz said.

A version of this story will appear in the April 11 edition of IFR Magazine. (Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Sudip Roy and Matthew Davies)

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