By Vivianne Rodrigues and Pan Kwan Yuk
Things just keep getting better and better for Mexico.
The country’s stock market is having a record-breaking run. Manufacturing is chugging along nicely. Consumer confidence is at a five year high. And now comes the cherry on the cake – long-term borrowing costs for Mexico this week fell to an all-time low.
The Latin American 2013 debt season kicked off on Monday with Mexico tapping the US debt markets with a $1.5bn offer in 30-year bonds.
The bonds, a re-opening of the country’s 2044 original debt sale from March, were sold to yield 110 basis points over comparable US Treasuries, or 4.19 per cent – the lowest spreads and yields for 30-year Mexican bonds ever recorded. Orders for the issue came in at $3bn.
Average spreads on Mexican debt over those of comparable US Treasuries have dropped almost 150 basis points from 216bp a year ago, according to JPMorgan Chase indices.
This is in line with the 155bp drop seen in the average spreads of emerging markets debt over US Treasuries, which currently stand at 256.78bp.
“The bond priced well and has continued to perform, driven by the positive momentum Mexico has been enjoying, with a solid economy and a new president,” said Monica Hanson, head of Latin America Global Finance at Barclays, one of the bookrunners for the issue.
“There continues to be a lot of interest from investors in the US,” she told beyondbrics. “Even with spreads tightening, investors can still get incremental yield out the curve and in the UMS credit, a high quality borrower.”
But it is not just the low yields that are noteworthy. The fact that Mexico has managed to get global investors to finance them for 30 YEARS for less than 2 percentage points above US Treasuries underscores just how far the country has come since the 1994-1995 Tequila crisis, when it found itself in the midst of a financial crisis and a swingeing devaluation that together shrunk the economy by 6 per cent.
Simply put, no bond trader would have believed you if you told them 20 years ago that Mexico would one day carry an investment grade rating and be able to take out a $1.5bn 30-year loan at a cost of just over 4 per cent.
But these are extraordinary times in the bond market. Record-low interest rates in developed markets have driven investors to search for higher yields and, by extension, to emerging markets.
Mexico, concurrently, has also done much to put its financials and economy in order. The country now has some of the lowest private-debt-to-GDP ratios in the region – roughly 20 per cent compared with 50 per cent for Brazil and 80 per cent in the case of Chile. Rising wages in China have led to a resurgence in its manufacturing sector, fuelling its export-led growth engine.
Is it any wonder that Mexico has become the sweetheart of international investors?
Hanson from Barclays said she expects the momentum behind Mexican and LatAm debt sales to continue.
“This year has the makings of a very strong year for Latam debt sales,” she said. “The bid for Latam sovereign paper will continue in 2013 as liquidity is still higher in that segment of the market. But while last year was tremendous for Latam sovereigns and high-grade corporates, hopefully this time around will also be very good for the high-yield portion.”
“Appetite to go down in credit quality is definitely there from a number of different investors and we do expect to see high yield Latam credits to capture a larger portion of the overall corporate issuance pie.”
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