The United Mexican States
scrapped the 21 year tranche of its bond issue this week and
opted instead to only issue a five year, disheartening Latin
American markets by highlighting the divide between prolific US
high-grade borrowers and emerging sovereigns deprived of market
access for new long-dated paper.
Mexico, rated Baa1/BBB+/BBB+, on
Wednesday morning with leads Credit Suisse, Deutsche Bank and
HSBC, sought to issue around $1.5bn to $2bn through a five year
tranche and a new 21 year benchmark. But when the deal was
announced there was a sell-off in Mexican paper as the market
re-adjusted to the prospect of new supply.
The adjustment was deeper than expected and
disproportionately concentrated at the long-end of the curve.
Bankers say on average the short-dated paper widened by around
20bp compared with 30bp for the long-end.
It demonstrated how the market
would not be receptive to new supply with longer maturities.
But the leads persisted and sent out official pricing guidance
of 437.5bp- 450bp over US Treasuries on the 21 year, expected
to be around $500m to $750m, and in the 425bp area for the five
This represents around 65bp concession compared with the 2034s,
say rival bankers. But the longer paper only received around
$600m of interest with many seeking wider levels. The 21 year
was cancelled, though the five year SEC-registered global went
The $1.5bn 2014 bonds were priced at 99.424 with a 5.875%
coupon to yield 6.010%, or 425bp over US Treasuries in line
with official pricing guidance. According to bankers on the
transaction, the new issue concession represents around 35bp
compared with the 2014 benchmark. But some rival bankers say
the concession could be in between 50bp to 60bp depending on
Wednesdays trading levels. This compares with the 40bp
pickup for Mexico 5.959% 2019 in December that reopened
international markets for emerging sovereign issuers. That debt
sale had a spread of around 390bp and was widely praised for
its canny execution as well as competitive pricing.
In any case, the 2014 deal
traded up in the aftermarket up from 99.424 to 99.50 at around
5.93% to 5.99%, comfortably inside the original 6.010% yield.
The deal attracted a modest $3.25bn of orders from 200
accounts. Around 55% come from the US, 20% in Europe and 25% to
Mexico and Latin America with an overwhelming real money
One rival banker has described
this weeks scraped 21 year tranche as a "significant
negative market development", highlighting the lack of demand
for long-dated paper and the difficulty in determining
market-clearing levels for less straight-forward deals.
A lead on this weeks
transaction said: "Obviously we did not like to scrap a deal
and in hindsight, the market was not ready to take more Mexican
risk being an emerging market issuer."
Another banker on the deal said:
"There is a misconception that this 21 year tranche was
marketed on a yield or coupon basis but instead it was on a
spread basis and in the end given the secondary levels, the
concession offer was too small."
But one banker away from the
issue said: "Emerging market issues are always seen from a
The issuers strategy aimed
to appeal to investors seeking both short and long-dated paper.
A re-tap of its new 2019s was not possible since it was trading
below its threshold price so a new issue would have not been
fungible. This was also the case for its 2040s. In addition,
the $1.5bn bond 2019 was issued only in December and is still
being digested by the markets. A 21-year off-the-run bond was
chosen since the 2030 maturity date was an easy round number
for the issuer and a possible discount of around 95 was mooted
to boost the trading prospects of the lower dollar-priced
Rival bankers say demand for the
proposed off-the-run benchmark should have been investigated
further before the issuer was advised that market access for
such a deal was forthcoming. To secure tight pricing, reverse
enquiry offers would have been necessary, said one banker,
citing investor wariness for new long-dated paper from emerging
Execution and pricing levels are
less relevant when "the primary culprit was supply
indigestion," said Siobhan Morden, Latin American debt
strategist at RBS Greenwich Capital in Connecticut. She said
that oversupply of Mexican risk was becoming a problem
following the $2bn deal in December and Pemex, the
quasi-sovereign oil company, raising $2bn at end-January.
This is a rare misstep in global
capital markets for Mexico since it has earned the reputation
of being one of the most innovative and investor-savvy
sovereign issuers in emerging markets in recent years. The
government of president Felipe de Jesús
Calderón has embarked on an array of debt buy-backs
and yield-curve clean ups to establish a liquid benchmark with
a strategic extension in the long-end of the curve.
Mexico last launched a five year
bond in April 2003 with a $1.5bn. In any case, the government
has successfully fulfilled its 2009 funding requirements and
opted to issue now instead of waiting until conditions
potentially deteriorate or US Treasuries widen. The country has
around $3.2bn of upcoming debt maturities this year and a $1bn
to $2bn global bond was expected from the issuer but not so
Mexican credit default swaps
have been trading in line and below Brazil this week a
historic first demonstrating concerns about the
countrys strong economic links with the US. In addition,
sovereign spreads have widened in recent weeks amid rumours of
a possible credit downgrade and the central banks recent
costly attempts to support the peso.
The issuer paid 30bp in fees
the same for Decembers debt sale. This is still
relatively low and has disappointed bankers hoping for higher
compensation in the choppy environment. Though the scrapped
deal has sent shockwaves through Latin markets this week, the
fallout for Mexico should be minimal. One banker in New York
concluded: "Ultimately, the market will forgive Mexico and
forget this unusual episode while investors are still in love
with the credit."