NEW YORK, June 9 (IFR) - Mexico’s CFE fell victim to US rate volatility, ambitious pricing goals and an illiquid curve Tuesday, when it was forced to make a rare reversal in guidance on a new 30-year bond.
Investors pushed back on initial thoughts of high 200s on a day that saw yields on the 30-year US Treasury spike to a seven-month high of 3.183%.
This forced leads to launch the US$700m deal at a much wider 300bp over.
“Given US rate volatility and relative spread to Pemex, syndicates needed to revise the guidance on the new 30-year transaction,” said a US-based investor.
Aside from rates, confusion also arose over where the relatively illiquid bonds of the state-controlled utility should trade compared to its counterpart in the oil space, Pemex.
The oil shock earlier this year had reversed trading patterns between the two state-owned credits, leaving the defensive utility to trade inside the more volatile Pemex.
As crude prices stabilized, however, secondary levels normalized closer to where they had been with Pemex, once again starting to trade inside CFE.
However, CFE’s curve remained relatively flat, which may explain why the company chose to target a long bond despite the back-up in US rates.
The difference in spreads between CFE’s 10 and 30-year bonds was just around 10bp, compared to 35bp-40bp for the sovereign and 65bp-70bp for Pemex.
“Optically the 30-year looked very attractive on a spread basis,” said a syndicate official away from the deal.
The problem was the buyside was focused on where CFE should trade to Pemex and the sovereign, rather than secondary levels on what was considered an illiquid 2042.
“They fell victim to looking at the 2042 and they ignored UMS and Pemex,” said the syndicate official.
A US$700m cap on the deal size certainly acted as an incentive for investors, many of whom had expressed displeasure at Embraer on Monday when it both upsized and tightened a US$1bn 10-year yesterday.
However, different from the Brazilian airline manufacturer, which initially gauged buyside appetite with a generous pick-up to secondary yields, CFE was seen starting relatively tight, with investors assuming that IPTs in the high 200s could ultimately end with pricing in the 270bp-275bp area.
That left little pick-up to CFE’s existing 2042s, which were being quoted at a G-spread of around 265bp-270bp, and more importantly looked rich against Pemex’s 2046s, which were trading at 295bp over US Treasuries.
At a final spread of 300bp, the bond is seen essentially coming flat to Pemex’s secondary or inside where a new Pemex 30-year would have priced. BBVA, Bank of America and Goldman Sachs acted as leads on the deal, which is rated Baa1/BBB+/BBB+.
Lima Metro Line 2 Finance Limited is out with initial price thoughts of 6% area on a 19.1-year senior secured bond. Pricing is expected as early as Wednesday.
The amortizing bond is being sold under a 144A/Reg S format. It has a weighted average life of 12.8 years and a principal grace period of 4.1 years.
The listing will be in Luxembourg and the bond will be governed by New York law. Ratings are Baa1/BBB/BBB.
Global coordinators are Citigroup, Morgan Stanley and Santander, while Banca IMI, Bank of America Merrill Lynch, BBVA, Credit Agricole, Natixis and Societe Generale are coming in as joint bookrunners. Co-managers are Deutsche Bank and SMBC.
Salvadoran bank Banco Agricola, rated Ba2/BB+, has mandated Bank of America Merrill Lynch and Deutsche Bank to take it on the road to market a 144A/Reg S senior unsecured bond.
The borrower will wrap up marketing in Boston and New York on June 10. Banco Agricola is 97.35% owned by Bancolombia, which is rated Baa2/BBB-/BBB.
Brazilian telecoms firm Oi is finishing marketing on possible euro 144a/Reg S bond. The Ba1/BB+BB+ rated firm has mandated BB Securities, BofA Merrill Lynch, HSBC, Santander, Bradesco BBI, Citigroup, Deutsche Bank, BNP Paribas, BTG Pactual and Itau BB to arrange the meetings. (Reporting By Paul Kilby; Editing by Marc Carnegie)