Clearing a new path
Pemex’s innovative Euroclearable local bond bucked the trend in a year that saw investors largely flee peso-denominated instruments as many Latin American currencies sunk to new lows in 2015.
The Mexican state-owned oil company broke new ground in February when it targeted foreign accounts with the first ever Euroclearable local corporate bond through a Ps17bn (US$1.15bn) tap of its peso-denominated 7.47% 2026s.
By settling in Euroclear and the local clearing house Indeval, the deal allows international accounts to participate in a local instrument that is easily tradable in both the domestic and international markets.
With this new format – dubbed ECCs or EuroclearableCerbures – Pemex sidestepped some of the complications and costs involved in trading Global Depositary Notes – the last innovation in an asset class that has evolved in fits and starts.
GDNs, which trade in dollars internationally but in pesos locally, had been criticised for their lack of liquidity and the length of time it takes to execute a trade.
“[The ECC] is traded in pesos in Euroclear and if I want to sell a Pemex bond in Mexico tomorrow, I can do it the same day, and that adds a lot more liquidity, ” said Charles Moser, a managing director at Morgan Stanley, which led the transaction along with BBVA, Bank of America Merrill Lynch, Citigroup, HSBC and Scotiabank.
The ECC is seen as the next step in the process and essentially mimics what the national government has done in its Treasury market, where foreigners have long been active participants.
The trend is an important one for emerging market corporates, which are increasingly wary of US dollar funding at a time when EM currencies have tumbled in value, alongside the prices of commodities that many Latin American countries export.
“If you can do a long-dated local currency issue and sell that internationally, you should,” said Chris Gilfond, head of Latin America Capital Markets Origination at Citigroup. “It is good funding and matches most borrowers’ revenues.”
Quasi-sovereign utility CFE and America Movil’s cell tower spin-off Telesites were quick to replicate the structure, with the latter quickly adding an ability to settle through Clearstream as well.
More foreign accounts means improved pricing for Mexican corporate issuers, which to some extent have been held hostage to the handful of pension funds that dominate the country’s local markets.
Unlike recent GDN issues, which saw the vast majority of the funding being raised locally, Pemex’s ECC placed about Ps9bn of the Ps17bn bond among international accounts.
“The end goal is to make it as simple and as easy as possible to attract the most cross-border investors into the local market,” said Katia Bouazza, co-head of global markets for the Americas at HSBC.
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