Sovereign Analysis /

Mexico risks addiction to debt, but reiterate Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 January 2020
    Published byTellimer Research

    Mexico announced today that the sovereign will issue a two-tranche, Euro-denominated bond comprising:

    • Tranche A: A new "benchmark" 10-year bond, which has been set at EUR1.25bn (but given recent issues, we do not discount the possibility that Mexico could issue a higher amount, perhaps even EUR1.5bn). Final price guidance for the new senior unsecured bond is mid-swaps +105bps to +110bps, which we believe could tighten by some 10-15bps below the lower end of guidance; and
    • Tranche B: A EUR500.0 tap (no-grow) of the country's EUR1.0bn, 2.875% senior unsecured bond due 2039 (A3/BBB+/BBB), currently seen trading at cEUR114.471 (ALLQ) to yield c1.96% (to-worst) for a g-spread of 186bps and a z-spread of 147bps. Initial price guidance for the tap is in the WPIR 2.00-2.05% area, which we believe will converge to where the currently-outstanding bonds are trading, offering little-to-no concession for the tap.

    We believe that while the sovereign is clearly taking advantage of the constructive market conditions, which allow Mexico to print at very low rates, it is also at risk of saturating the market with a lot of new paper. We worry that once that the Q4 19 GDP numbers are released and we begin to see further downward revisions for growth in 2020 (and investors see the economic stagnation), these new bonds – along with the recent dollar issues – and the Mexican curve in general could price slightly lower.

    We wonder if Mexico is getting "addicted to debt", particularly after the Ministry of Finance (Hacienda) tapped into the Stabilisation Fund in order to compensate for lower fiscal revenues. What's more, we believe that fiscal revenues will come short of the budgeted amount in 2020 and this could jeopardise not only the performance of the bonds, but could also trigger potential rating action.

    Still, in the short-to-medium term, we do not see a crisis brewing and we therefore reiterate our Hold recommendation on the Mexico curve.