Mexico optimism could fuel capital markets activity
July 18 (IFR) - Mexico has seen a burst of optimism since Enrique Pena Nieto's presidential election victory this month, as markets bet on an end to the stalemate over reforms and a reversal of the slow growth that has plagued the economy in recent years.
This is all potentially good news for local capital-market activity, as rates drop and corporate issuers seek funding for investments and to cover some US$28bn in bond maturities during 2013-16. It may also be a boon for lower-grade borrowers who do not have ready access to local markets but may find a receptive audience in the dollar markets instead.
"There is still substantial relative value in Mexico," said a DCM banker. "Mexican high-yield names trade cheap to other jurisdictions."
Mexican construction firm ICA looks likely to be the first true LatAm high-yield credit to test international investor appetite for months.
"It will be interesting to see what they do," said the banker. "What level ICA comes at will tell us a lot about the strength of the market for high-yield credits."
The abrupt rally in Mexican rates around the elections surprised many analysts. For instance, the 10-year Mbono was trading at around 5.21% Friday, tightening from 6.26% in mid-May. According to Bank of America Merrill Lynch, the 10-year has tightened more than 90bp since June, while the 30-year benchmark has seen spreads narrow 120bp.
Aside from the election results, BAML analysts put the sudden rally down to a convergence of events, including an increase in investment flows chasing a cheap peso, low Mbono inventories and shrinking yields on US Treasuries on the back of concerns over global growth and a worsening in the European debt crisis.
In June, the percentage of foreigners holding Mexican fixed-rate Mbonos increased from 44.5% to 47.5%, as a result of inflows of US$3.5bn, while spreads on the five-year sovereign CDS shrank all the way to 124bp, putting them some 23bp inside Brazil.
Indeed, it is thought telecom America Movil's intention to tap the europeso market on a regular basis may be meant to capture that strong bid from international accounts for peso paper, not to mention an attempt by the company's savvy CFO to show local pension funds that he has an alternative funding base in pesos.
However, with the currency back in the 13.20s against the dollar, not all bankers are convinced there will be a strong bid. "The question is whether or not the market will be there in the size to which America Movil has grown accustomed," said a banker.
Not only do the economic fundamentals warrant even lower rates in Mexico, but the country's bond yields still have some catching up to do in relation to US Treasuries, adds Bank of America Merrill Lynch.
With local corporate bond maturities set to spike in coming years, borrowers must be pleased to see such a drop in yields. About Ps96bn (US$7bn) in corporate debt is expected to mature in 2013, rising to Ps162bn in 2014 and to Ps115bn in 2015, according to data provided by Banamex.
Although most local bonds are linked to a TIIE rate that has barely budged, staying at around 4.78%, an Mbono rally may result in more fixed-rate issues and increase volumes overall.
"As this is the format pension funds favor, there would be demand for such paper," said a banker. "Issuers were issuing in TIIE as the Mbono was not an attractive rate, but it is now."
BETTER TIMES AHEAD
Year-to-date total corporate debt issuance has reached just Ps92bn versus Ps104bn during the first two quarters of last year, but against the more positive backdrop, activity is expected to pick up, with one banker forecasting volume growth of 15%-20% over last year.
Aside from refinancing pressures, investment needs in certain sectors are likely to drive capital-market activity going forward amid expectations that the Mexican economy is poised for a much healthier pace of growth, even if the new president fails to push through reforms.
"Even if reforms do not take place, the growth rate should be between 3.5% and 4% per year," said an analyst.
Many are bullish after eight years of lackluster 2.6% growth, among the lowest in emerging markets over that period.
"In the next decade Mexico is likely to become LatAm's largest economy and one of the most dynamic among emerging markets," Nomura analyst Benito Berber wrote in a recent report.
Berber cites the new president's party's support of pro-market reforms, the latent lending potential of a banking system that remains comparatively small, and favorable demographics.
Sectors like manufacturing, consumer and industrials, in particular, are expected to benefit from more robust GDP numbers, making them likely candidates for local debt excursions.
"We expect companies from these sectors to take advantage of the low interest rates as they are expected to increase investment," said a Monterrey-based asset manager.
"Companies in these sectors will likely grow and, as a result, probably issue debt in the local market, which we will be interested in buying."
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