FIBRA UNO Trust F/1401 (ticker FUNOTR), a Mexican REIT (Real Estate Investment Trust), issued a two-tranche bond yesterday as follows:
- Tranche A: US$400 million, long 10-year, launched at T + 287.5 bps, and;
- Tranche B: US$600 million, long 30-year, launched at T + 387.5 bps.
Both tranches are expected to be rated Baa2/BBB by Moody's and S&P, respectively.
While FIBRA UNO is by far the largest, best capitalised, and most diversified Real Estate Investment Trust (REIT) in Mexico, we see these bonds as tight, mainly on what we believe are deteriorating fundamentals for the real estate industry in Mexico, something that in our opinion, the current issue spreads do not reflect.
Most economists in almost every survey, as well as institutions such as Mexico's Central Bank Banxico, and the Ministry of Finance itself, have consistently reduced their expectations for GDP growth in Mexico for 2019; Most project that this figure will show economic growth of c1.0% in a best-case scenario and even some believe that an economic recession in Mexico is around the corner due to lower economic activity resulting from lower government spending, impaired private investment, and uncertain public policies that continue to affect confidence in the private sector. The private sector appears to be in "wait-and-see mode" and is reluctant to deploy its capital into productive activities.
These factors are likely to affect (negatively) tax collection and, as a consequence, the availability of public funds, which could put at risk the government's target of a 1.0% primary surplus in 2019.
In addition, construction (a sector that has been severely hit, particularly in Mexico City after the local government cancelled most permits and suspended many ongoing construction sites) is typically one of the first sectors to be affected by an economic downturn.
While FIBRA UNO's portfolio of assets is well diversified and its corporate properties are typically rented in US dollars and enjoy high occupancy levels, a drastic move in the MXN exchange rate could spell trouble for the REIT, perhaps in the form of contract cancellations or rent renegotiations.
Still, as stated before, we believe that FIBRA UNO is the soundest FIBRA trading in the market and that the credit is solid, but we also believe that investors should have demanded a higher premium in terms of yield given the risks we highlighted above. While not seen yet in the public statistics (expected to begin being made public next month), we think that as the trends become more visible, those investors that still believe in Mexico and still believe that the government and the AMLO administration is running the country appropriately (a view we strongly disagree with) could be disappointed.
Thus, we consider the yields of FUNOTR tight and would expect bond prices to drop as official statistics begin to come out and confirm the conservative (if not patently weaker) estimates from the different Mexican statistics and public financial institutions.