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Added political risk brings urgency to Mexico's local DCM
June 5, 2012 / 1:56 PM / in 5 years

Added political risk brings urgency to Mexico's local DCM

NEW YORK, June 5 (IFR) - Mexico’s local market pipeline is quickly growing ahead of the July 1 general elections as uncertainty over political risks increase in the wake of polls showing leftist Andres Lopez Obrador making gains against PRI candidate Enrique Pena Nieto.

This marks a reversal in sentiment from just a month ago when borrowers expressed little hurry in tapping markets amid expectations that the sexenio (six-year term) transition of power would move ahead without any bumps.

“In the past few weeks there has been more volatility and uncertainty about the election than had previously been the case, so some issuers have decided that coming to the market before the election would be a good move,” said one Mexico-City based DCM banker.

Ten borrowers are now preparing bond deals in June alone, with the potential of bringing Ps12bn (US$834m) in new supply that month. That is almost double the Ps6.8bn seen in April and May after a robust first quarter that generated some 52.9bn worth of new issues.

Aside from uncertainty over the outcome of the elections, historically low interest rates and looming threats from the European debt crisis are creating a sense of urgency among borrowers. Moreover, a dearth of new issuance means investors have cash to put to work.

However, not all deals may see the light of day before the elections.

“The volume is not necessarily too big for the market to handle, but there are some names that I don’t think investors will buy at the moment, especially from the financial sector as there has already been considerable supply this year,” said another DCM issuer.

Financials awaiting a June issuance include Banorte’s Ps3.2bn 10-year, Banca Afirme’s Ps1bn 10-year, and a Ps1bn three-year from Holding Monex.

The financing arm of car maker Daimler is also looking to price three-year bonds in June, though the size of the issuance and exact date are yet to be determined.

Among other deals in the pipeline is Mexican state-backed mortgage lender Infonavit, which is issuing up to Ps1.95bn in 28-year bonds, while cement maker Holcim Capital has fast forwarded its Ps2bn dual-tranche offering comprising fives and 10s.

“It was expected to price in the second half of the year, but there is liquidity and the company’s view is that peripheral volatility from Europe will actually worsen considerably so they decided to come to the market now,” said a Mexico-City based banker.

Mexican conglomerate Grupo KUO is also set to pull the trigger on a Ps700m seven-year on June 20, while Mexican mining company Penoles is coming with an unusual dollar-denominated 10-year to raise up to US$300m.

Bankers are speculating that the Penoles trade may be delayed given that investors won’t want to buy dollar assets when the peso is weak ahead of the elections.

A post-election issue would make more sense as the currency would have likely strengthened by then and investors would therefore be more willing to buy the paper.

Penoles issued dollar-denominated certificados bursatiles in 2010 with the aim of matching liabilities and revenues.

“The company generates income in dollars and wanted to issue local dollar bonds to build out the local dollar curve,” said a lead banker.

But questions remain over why the mining company doesn’t spread its net wider to capture a broader group of investors through a 144A/RegS offering.

Legal costs are certainly higher and disclosure requirements are arguably more stringent, but the credit would probably lock in cheaper funding.

“They would get better funding with a 144A issue,” said another banker. “There are a lot of people who would like to buy the credit but aren’t willing to set up an Indeval account to buy it locally.”

Banamex, BBVA Bancomer and Santander are the joint bookrunners. Proceeds will be used to fund expansion and reduce project costs.

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