Latin America Bond: Pemex's €4.25bn triple-tranche bond

In a rough year for Mexican issuers, Pemex defied expectations to sell the largest-ever euro-denominated bond issue from an EM borrower despite concerns about the impact of the Trump presidency in the US.

Mexican issuers had a tough year in 2017 following the election of President Donald Trump, who had promised to renegotiate the North American Free Trade Agreement and build a wall between the two countries.

And while the uncertain backdrop had many of the country’s borrowers hesitating over when to print deals, Pemex could not afford to waste time given its large financing needs.

Following a successful US$5.5bn three-part bond offering in December, the state-owned oil company turned its attention to euros in February – just as fears of a Marine Le Pen victory in France’s election was roiling markets.

“The expectation was that there wasn’t going to be too much paper, so it was a very good moment and very good timing,” said Juan Claudio Fullaondo, co-head of DCM for Latin America at HSBC, which acted as lead along with BNP Paribas, Credit Agricole and Deutsche Bank.

Little competing supply meant Pemex had the runway to itself, but the borrower took no chances and tested the waters with attractive pricing – much as it did with its US dollar trade just a few months earlier.

Books swelled to €16.2bn as European investors clamoured to participate, allowing leads to print a €1.75bn 2.5% 4.5-year at mid-swaps plus 240bp, a €1.25bn 3.75% seven-year at plus 340bp, and a €1.25bn 4.875% 11-year at plus 405bp.

A final size of €4.25bn meant that Pemex out-gunned a Petrobras €3.05bn multi-tranche trade in 2014, which had until then held the record size for an EM borrower in this market.

“When we started the process we thought we would only print €1bn–€1.5bn,” Fullaondo said. “There was strong appetite for the LatAm region in the European market despite all the NAFTA and US issues.”

Pemex also timed the deal well following a substantial rally in Mexican assets thanks to a US border adjustment tax proposal that didn’t just penalise Mexico.

Leads were able to tighten pricing by 35bp–40bp from start to finish after releasing initial price thoughts of plus 280bp area, plus 375bp area and plus 445bp area, respectively.

And even though final spreads offered hefty double-digit concessions – not to mention were expensive levels to dollars – the deal helped put to bed a good chunk of Pemex financing needs away from its core dollar market.

“It is about your average cost of financing,” said a banker at the time. “They got a lot of size done.”