Mexico Announces $6bn Frn Buyback

Mexicos finance ministry on Tuesday announced a huge debt refinancing to prepay $6 billion in floating-rate bank notes backed by the countrys oil revenues, sharply cutting the countrys borrowing costs.

To buy back the securities, Mexico will rely on various funding mechanisms, including raising the amount of a 10-year note issued in January to $1.5 billion from $1 billion.

The refinancing would slash Mexicos average maturing debt for the next three years to $935 million per year, it said. The ministry did not disclose the previous level of maturing debt, saying only that it had been $30 billion in 1995 alone.

 

I view it as a sign that they are more efficient at liability management, said one US speculative investor. Its a way of eliminating expensive debt. Mexico had issued the $6 billion of notes backed by oil revenue in August 1996, when the country was just emerging from recession and reintegrating itself into the international capital markets. This included $1 billion of five-year floating rate bonds. The issue appealed to international investors because it received investment grade credit ratings based on the firm support of Mexican oil revenues. Conditions in the emerging markets have improved markedly over the past year, however, and Mexico no longer needs the firm backing of its oil proceeds.

Its a nice sign of relative strength that they are retiring one of the first things they issued when they were in trouble, said another US investor. The worlds awash in liquidity, so why not refund this stuff.

Traders agreed the move was positive for the countrys economic outlook.

Once the elections are done, I think progress Mexico has made in refinancing its debt efficiently opens it up for a ratings upgrade later this summer, a trader said.

The finance ministry said the $6 billion prepayment would be made on August 6, and would amortize bank notes issued on August 5 last year to pay back the US Treasury for an emergency bail-out during Mexicos 1994-95 peso crisis.

Market sources said the expansion of the 10-year note issued in January to $1.5 billion relieved price pressure that had developed when a major Mexican investor bought up a large share of the issue.

There was talk that some big speculator went in and bought up the whole (2007) issue and a lot of guys were feeling pain about it, said one bond trader.

The largest sources of funding will come from international capital markets, including $2.5 billion from recent operations and $2 billion from current operations.

Among other resources are a $400 million bank credit and $1.1 billion medium-term note programme which will be completed soon, the finance ministry said.