Last year, the World Bank became the first foreign issuer to launch a bond in Mexican pesos. The bank’s 1 billion peso ($106 million), three-year euronote helped Mexico raise international interest in peso-denominated securities and gave the multilateral bank a well-priced bond. While other international issuers have yet to sell peso-denominated bonds, the World Bank has set the stage for further development of the Mexican capital market.
The Bank subsequently issued an inflation-linked bond in Chilean pesos, underscoring its commitment to Latin America’s domestic bond markets. Uruguay also issued debt denominated in Chilean pesos late last year.
The World Bank began sizing up the Mexican market two years before it issued the peso bond. “We received excellent support from the Mexican authorities and we worked very closely together in the design of the operation,” says Gumersindo Oliveros, director of treasury finance at the World Bank. “We all agreed that choosing the right timing was going to the particularly critical for the success of this transaction.”
The environment became especially favorable early in 2000 when investor demand for Mexican peso-denominated assets had increased with positive Mexican economic and financial news, including an expected decline of inflation to less than 10% for the year. Despite uncertainty about the upcoming presidential election, the markets seemed comfortable with stabilizing fiscal policies put in place by former President Ernesto Zedillo. In late January, the rating agencies announced they were considering raising the country’s foreign currency rating and three months later, Moody’s awarded Mexico an investment-grade rating.
Around that time, the Mexican government launched its first three-year, one billion peso Cetes auction, which was four times oversubscribed, with strong interest from domestic, US and European investors. Shortly after that issue, the government bond market tightened by more than 100 basis points, and the Mexican government decided to make the most of this investor momentum. Because of its strong international reputation and its triple-A credit rating, the World Bank was an appropriate vehicle for broadening the kinds of available securities in Mexico’s capital market.
“The World Bank is getting very attractive pricing relative to its other options in the international markets and is also helping Mexico promote its local capital markets,” says Moctar Fall, head of emerging capital markets at J.P. Morgan, which operated as Chase Securities last year and lead-managed the peso-denomnated World Bank bond. “For the Bank, it’s a win on both fronts,” he says.
The peso issue was structured as regular fixed-rate euronotes with bullet repayment that will be swapped into dollars. The notes were priced to yield about 16% semi-annually at the re-offer price of 99.783% of par. This was equivalent to a yield of 25 basis points under the yield of the Mexican government’s three-year benchmark bond.
The Bank saw an opportunity to raise capital at an attractive price. Like all of the other funding that the World Bank raises in capital markets, the proceeds from the Mexican peso issue was pooled with the proceeds from other issues to finance bank loan operations worldwide.
J.P. Morgan was a senior co-manager on the bond. Banamex, Bancomer, Banco Bilbao Vizcaya Argentaria and ING were co-managers. Demand by global investors for the World Bank peso bond was strong, enabling the managers to fully place the bond at launch.
However, one institutional investor comments, “It was great to open up the currency, but it is still not a core holding of any emerging market guys.”
Fall says the peso bond was attractive to investors because they were able to obtain a triple-A rated security in Mexican pesos at a price close to that of a domestic government bond. The issue therefore represented a new market segment for foreign asset managers looking for Mexican exposure without taking on additional sovereign or corporate credit risk.
“Large US institutions had a view on the peso and wanted to express it without buying in the local market,” says Fall. “By buying a peso-denominated issue they could get something that was comparable to local Mexican yields.” He says that US investors were wary of Mexico’s capital markets ever since the 1994 peso crisis. Now they have regained confidence in local securities, he says.
The transaction attracted a new and varied investor pool to the peso. North American investors bought 93% of the issue, and the balance was placed with continental European accounts. Fund managers accounted for 70% of the issue, retail investors purchased 19%, insurance companies took about 7% and pension funds bought the remaining 4%.
The World Bank has a history of helping to open a number of emerging market currencies, such as the Polish zloty and the South African rand, for international issuance. After several years of international use, both currencies have developed into common investment instruments for asset managers and retail investors.