Terrafina, a Mexican Real Estate Investment Trust (REIT) or FIBRA, is expected to issue a 10-year bond today through its Special Purpose Trust ECI Banco, S.A. Institucion de Banca Multiple/Trust F/00939 rated Baa3/NR/BBB-.
The new bond will fund the tender that the company has issued for existing notes, refinance existing indebtedness and fund other general corporate purposes, if any. The bonds are senior unsecured and the initial price talk (IPT) is T+325bps, which we consider tight given that (1) recent industrial production indicators in Mexico continue to show a deterioration in the construction activity segment, and (2) the spread for the new bond does not provide investors with an attractive premium over the company’s existing bonds, in our view.
Terrafina’s US$425mn, 5.25% senior unsecured bonds due 2022 (rated Baa3/BBB-), issued by PLA Administradora Industrial S. de R.L. de C.V., are currently trading at cUS$104.828 (ALLQ) to yield c3.69% (g-spread 187bps; z-spread 186bps). It has a duration of c3.064 years.
With the 10-year US Treasury yielding c2.09%, the expected coupon, according to the IPT, would be c5.34%. Under normal economic conditions, we would consider this yield fair. However, if construction activity continues to decline in Mexico, and/or if other economic variables change – growth is lower than what economists and Banco de Mexico estimate (less than 1.0% for 2019) – the peso could suffer unless the reference rate remains at current levels. We (and many others) believe that the current reference rate is high and not conducive to promote higher levels of growth. However, the current levels have anchored the peso so far and hence will leave Banco de Mexico in a conundrum.
If mounting pressure from the executive branch (and by two members of Banco de Mexico’s Board of Governors) to lower rates were to result in a reference rate reduction, this would likely cause the peso to weaken. In such a scenario, companies like Terrafina that charge most of its tenants in pesos (but linked to the US dollar) could see a decrease in occupancy. This could be further exacerbated if Mexico enters a technical recession, pending the Q2 19 GDP numbers on 31 July (preliminary/estimated) and 23 August (final).
For these reasons, we believe the overall trend for Mexican REITs is risky. Thus, in order for us to consider REIT bonds attractive, we would like to see a higher premium for new issues.