Mexican state-owned oil company Pemex thrilled Latin markets
this week by pricing a $2bn 10 year benchmark with a hefty $6bn
of demand, boosting hopes top quality private sector borrowers
will soon come to the market.
In addition, low absolute US
Treasury yields helped to reduce the all-in yield costs of the
2019 deal and placed a ceiling on the new issue concession
despite the historically wide secondary levels on Pemexs
existing curve. As a result, this corporate deal along
with Chilean copper producer Codelcos successful $600m
issue last week is encouraging issuers that external
markets are open for investment grade issuers willing to offer
On Tuesday, the Mexican
quasi-sovereign priced its $2bn 2019 bonds at 99.130, with an
8% coupon to yield 8.250% and equating to 570.7bp over US
Treasuries. The lead managers Calyon, Citigroup and HSBC with
co-manager Santander took advantage of the relative stability
in Latin credit markets and higher US stock indices early in
the week to launch the deal for the BBB+/Baa1/BBB rated
One lead manager said that the
market tone on Monday and Tuesday offered "a breather from the
volatility and we wanted to go out to investors before the
Federal Open Market Committees statement on
At 9am the leads sent out soft
guidance of 8.5% for a benchmark issue to investors. This would
have represented a 35bp-50bp premium over its underlying curve,
bankers away from the transaction calculated.
However, the senior unsecured
medium term notes sucked in around $3bn by 11am. This allowed
the leads to send out official price guidance of 8.25%-8.375%
at midday and to price the 144A deal this tight while
increasing the total to $2bn that afternoon.
Investors are increasingly
discriminating between sovereigns and government-owned
corporates.Pemex has a well known and liquid borrowing profile.
As a result, its 2018s were referenced for pricing rather than
Mexican government debt. On Tuesday morning, the 2018 notes
yielded around 8.11%.
Bankers say the 8.25% yield
represents a new issue concession of around 15bp-20bp. One
banker pointed out that compensation for paper with an extra 15
month duration to the 2018s would, in theory, be around
5bp-10bp. On this basis, Pemex got a good price for the deal
considering Codelcos 35bp-45bp new issue premium for its
$600m 10 year bond last week and the 40bp Mexico paid for its
$2bn debt sale in December.
Since the start of the credit
crunch in August 2007, Latin spreads have remained tight
relative to other emerging market borrowers. But investors and
debt origination bankers now say secondary levels have widened
to reflect the deterioration in global credit markets and make
pricing new risk a little easier.
Over the past month,
Pemexs 2018s have been trading at a historical wide of
around 200bp to the sovereign due to declining commodity prices
and in anticipation of new debt supply. Pemexs low new
issue concession compared with its 2018 issue should,
therefore, be seen in this context, said Matt Ryan who manages
$3bn in EM fixed income assets at Boston-based MFS Investment
"The 2018s should have been
trading tighter relative to the sovereign and this helped to
ensure a relatively low new issue concession for the 2019s
while making the bonds cheap enough for us to buy."
Claudia Calich, senior emerging
markets portfolio manager at Invesco in New York, said that
downside adjustment in Pemexs spreads had helped
investors to take on new risk. But she reduced her orders for
the sale when official pricing was set at 8.25% on Tuesday
This transaction was issued as a
direct obligation of Pemex rather than through its special
purpose vehicle, the Pemex Project Funding Master Trust. This
fulfilled the regulatory requirements for Mexican domestic
investors to participate who benefit from swapping back the
dollar-denominated paper to fixed rate pesos to get a juicy
pick-up to the local curve.
The structure of the transaction
raised hopes that local bids would power the deal, especially
given that regional players bought 35% of Mexicos $2bn
deal in December. However, in the end around 70% of the Pemex
paper was sold in the US, 15% in Europe and around 12%-15% in
Mexico. About 250 accounts bought the paper with fund managers
taking 70%, pension funds 15%, and banks 10%.
The bond was quoted above par
and even a point higher in the immediate aftermarket. Rival
banks were complimentary about the pricing and execution of the
deal. "This got a lot of money at a fairly tight level so this
is positive for the market and should encourage other potential
issuers out there," said one Latin debt origination banker in
"Considering Pemex is
inefficiently run and seen as a cash cow for the Mexican
government, it is nice to see strong investor demand," said the
banker. On Monday, Fitch revised downwards its BBB
outlook on Pemex from positive to stable, citing lower oil
prices. This is the first deal from Pemex since it issued its
$500m 6.640% 2038s last May. It plans to increase its debt
burden by around $3bn this year and this weeks capital
raising will be used to finance its 2009 investment
Rival bankers speculate that
Calyon and Santander banks with relative small global
debt distribution capabilities were recruited to help
manage the 2019 deal in return for providing cash to the
company over the last year.
News that Santander was
recruited as co-manager only after the deal was announced
further fuelled this rumour. Bankers on the transaction did not
comment. The issuer paid 45bp in fees an indication that
compensation for executing new emerging market corporate deals
may be rising.
Pemex deal ignites
Bankers have seized upon
Pemexs deal to explain to potential issuers that
relatively low coupons can now be priced due to the low
absolute levels of US Treasuries that are reducing the all-in
yield costs of new deals.
Pemex tends to be a benchmark
setter primarily for Mexican corporates. However, there is
little hope that its investment grade domestic counterparts
such as broadcaster Televisar and mobile network operator
America Movíl will issue new bonds soon, due to their
low refinancing needs and the high spread levels for the
The market will be most
hospitable to debt issued by state-run Brazilian bank, BNDES,
as well as Andean multilateral institution, CAF. In addition,
bankers are advising less elite credits "to come now when the
market window is definitely open for sovereigns and
quasi-sovereigns we need a non-government owned
corporate to test the waters," said a debt syndicate head in
Meanwhile, the Republic of Peru
is attempting to court reverse enquiry orders to allow it to
issue a 30 year deal rather than a 10 year benchmark, said an
adviser on the long-awaited issue.
Petrobras shelves bond
Despite the positive response to
Pemexs deal, Brazilian government-owned oil company
Petrobras said no new bonds would be issued this year as
borrowing costs were still too high. "Petrobrass risk
curve needs to be more realistic than it is today. We need to
observe the market conditions and go to the market when they
are more favourable," said its chief executive, José
Sergio Gabrielli this week.
The company has secured $12.5bn
from the countrys state development bank, BNDES, and
intends to borrow around $5bn in the international loan market.
However, Petrobras has an aggressive $174.4bn investment
programme for 2009-2014 and will definitely need to seek
alternative sources of cash over the next two years, say
In any case, it is expected that
the $5bn loan will be repaid through dollar-denominated bond
sales when market conditions are deemed more favourable.
Petrobras reopened the Latin corporate market with a $750m 2018
issue last January with a yield of 5.86%, 205bp over US
Treasuries. However, the cost-conscious borrower would expect a
sub-8% coupon for any new 10 year benchmark, said a banker in
talks with the firm.
However, he said the 2018s notes
are only trading 130bp over the Brazilian sovereign while
Pemexs 2018 paper was wide 200bp-230bp to Mexico before
this weeks debt sale demonstrating the price
sensitivity of the Brazilian firm.
In February 2008, Petrobras
abruptly postponed its $500m re-opening of its global 2016s
after failing to attract enough investors for aver 5bp
concession offer at 210bp over US Treasuries.