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Mexico: Mixed bag of new issues

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

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    Tellimer Research
    27 January 2020
    Published byTellimer Research

    A very active LatAm primary market continues its run with a fresh round of new deals from Mexico. We see some that look good, while others are not as solid, from debut issuer Aeromexico to Alpha Holding – a credit that already has bonds outstanding, but whose credit quality is somewhat weak. It will be telling to see where each bonds price, as it will likely demonstrate if the market is still in the 'buy anything and everything that prints' mode, at yields we believe would not have been achievable under any other circumstance.

    First, Aerovias de Mexico, S.A. de C.V. (Aeromexico), a wholly owned subsidiary of Grupo Aeromexico S.A.B de C.V., is starting a series of meetings with investors today to issue a debut, senior unsecured bond for which no tenor and/or pricing guidance have been made available yet. The new bonds are expected to be rated B2/BB-/NR and proceeds will be used to refinance outstanding debt, fund capital expenditures related to investments in the airline's fleet, and for general corporate purposes. 

    Give that Aeromexico is the country's largest (and oldest) airline in terms of market share, fleet size and number of domestic and international destinations, we believe its closest regional comparable would be LatAm Airlines (LATAIR). The Southern Cone's largest airline (also in terms of fleet, and domestic and international destinations), LATAIR has a US$659.844, 4.20% 1st. Lien secured bond outstanding due 2027 (A3/BBB+/NR), that is currently seen trading at cUS$104.028 (ALLQ) to yield c3.36% (g-spread: 191bps; z-spread: 187bps). 

    If we assume a 10-year, senior unsecured bond for Aeromexico's new bond, we believe it should price several points above where LATAIR's 1st. Lien bond is currently trading. We believe that a fair spread over the LATAIR bond should be at least 300-350bps given the difference in ratings, so we would see the new Aeromexico pricing fair at c6.5-7.0%.

    The bond, if priced right, could be interesting for investors involved in names like LATAIR, GOLLBZ and AZUL, as it might provide them with a spread pick-up from a company that, by the sheer size of its market and dominant position in Mexico, could prove to be attractive. We'll be paying close attention to the guidance when it becomes available.

    Second, Alpha Holding S.A. de C.V. (ALPHSA), a non-bank financial institution (NBFI) with operations mostly in Mexico (with a small presence in Colombia), is planning a series of investor meetings in order to issue a senior unsecured bond for which no tenor and/or initial guidance have been given. The bond is expected to be rated B1/B+. 

    In our view, ALPHSA is one of the weakest financial institutions in this segment in Mexico along with Financiera Independencia (FINDEP) compared to its peers Unifin Financiera and Credito Real (CREAL). ALPHSA has a US$300.0mn, 10.0% senior unsecured bond due 2022 (B1/B+) currently seen trading at cUS$105.076 (ALLQ) to yield c7.99% (g-spread: 657bps; z-spread: 653bps).

    In comparison, UNIFIN has a US$200.0mn, 7.0% senior unsecured bond due 2022 (BB/BB) currently seen trading at cUS$104.124 (ALLQ) to yield 5.24% (g-spread: 381bps; z-spread: 377bps), while CREAL has a US$426.903mn (out of an original amount of US$625.0mn), 7.25% senior unsecured bond due 2023 (BB+/BB+) currently trading at cUS$106.424 (ALLQ) to yield c5.20% (to maturity) for a g-spread of 378bps and a z-spread of 376bps. 

    If ALPHSA were to issue a 6-year bond, it would compare to CREAL's currently outstanding US$400.0mn, 9.50% senior unsecured bond due 2026, currently yielding c4.61%, and to UNIFIN's US$300.0mn, 7.375% senior unsecured bonds due 2026 currently yielding c5.85%. Taking into account the rating differential, the relative strengths of both UNIFIN and CREAL over ALPHSA, and the better credit quality of the former two NBFIs, a theoretical 6-year ALPHSA bond should price fairly in the high 7.0% to mid-8.0% area. We will asses our assumptions as more information becomes available. Nevertheless, we favour quality over yield and would prefer UNIFIN and CREAL over ALPHSA, unless the latter compensates investors adequately.