January 26, 2017 / 8:27 PM / a year ago

Borrowers hesitate even as buyside eyes Mexico

NEW YORK, Jan 26 (IFR) - While cheap valuations have put Mexico back on bond investors’ radar, the country’s borrowers are far from ready to jump in, due to unease over US trade policies and soaring funding costs.

Mexican credits have been notably absent from the recent issuance surge in the region, which has seen more than US$20bn in new US dollar supply over the past three weeks.

Food company Sigma Alimentos has been the only name to dip its toes in the water, and even it is looking to issue in euros rather than greenbacks.

“Borrowers don’t need to force something through right now while there is so much uncertainty stemming from the macro level,” one banker told IFR.

“Sigma in euros, I guess, could be insulated.”

The Mexican credit space has had a bumpy ride since Donald Trump was elected US president on November 8 amid a pledge to dismantle the North American Free Trade Agreement.

The G-spread on the sovereign’s 2026 bonds gapped as high as 208bp on November 28 - up from 143bp before the election - and was still bouncing around 183bp on Thursday.

Mexico (A3/BBB/BBB+) now trades wide to most of its peers, including lower-rated Colombia (Baa2/BBB/BBB), which printed a new 10-year last week at T+160bp - a good 10bp tight to Mexico.

“Mexico had been well through Colombia and it is now well behind everyone,” said the banker.

It is a similar story with Mexico’s five-year CDS, which are trading around 167bp, close to the 182bp for Russia, a country with a lower Ba1/BB+/BBB- rating but one seen benefiting from Trump policies.

Such moves reflect the uncertainty over how Nafta negotiations - and plans for a wall on the US/Mexico border - will play out in coming months.

The three major rating agencies have the country on negative watch, which has hurt confidence in the sovereign as well as the credit standing of Mexican corporates.

Markets were further bent out of shape on Thursday when Mexico’s President Enrique Pena Nieto canceled a summit with Trump, who insisted Mexico would pay for the wall.

Yet while borrowers are sitting on the sidelines, international accounts are nevertheless showing a greater interest in Mexico.

“It used to be the focus was on Argentina, but right now it seems most banks are going on investor trips to Mexico,” said the banker. “Investors lack information, which is gold.”

The sell-off has been seen as a buying opportunity for many investors who like secondary levels on bonds issued by Mexico and quasi-sovereigns such as state-controlled oil company Pemex.

“I like the fact that I can buy Pemex at a lower price,” said Klaus Spielkamp, head of fixed-income sales at Bulltick. “ was too expensive before Trump.”

Sean Newman, senior portfolio manager at Invesco, takes a similar view on the sovereign and Pemex at these levels, while also acknowledging that potential pitfalls lie ahead.

“There are certainly risks to this trade as they go through the 22 chapters of Nafta,” he said. “We have to clarify what that might entail.”

Such clarity is a prerequisite for some investors waiting to step back into the market, especially given that prices are still off November’s lows.

“The selling pressure hasn’t translated into a big underperformance,” said Ricardo Navarro, a portfolio manager at asset management firm Noctua.

“So we are still a bit more hesitant - and don’t think it is worth jumping in at these prices.”

With Mexico facing potential electoral upheaval as leftist candidate Andres Manuel Lopez Obrador runs for president in 2018, the country’s borrowers face a tough year ahead.

But bankers think opportunities will come.

“Rolling out Trump’s protectionist measures will take longer than people think,” said the banker. “That will create a window for borrowers to get things done.” (Reporting by Paul Kilby; Editing by Marc Carnegie)

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