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 Business News | June 2005 
Mexico Mulls Over Bond Sale to Canada
 Wire services
Mexico may sell bonds in Canadian dollars for the first time since 1997 as it seeks to raise US600 million to finish refinancing international debt that matures in 2006, a government official said.
"We'll try to concentrate on markets other than the dollar to get the funding that we still need," Gerardo Rodríguez, Mexico's head of public credit, said in a June 9 interview in Mexico City. "When market conditions are appropriate for us, we may go ahead and access the Canadian dollar market."
Rodríguez said Mexico is also considering selling bonds in the U.K. or Japan. The bond plans are part of a strategy to line up financing for US3 billion of foreign debt maturities in 2006, to avoid a possible increase in borrowing costs during a presidential election year, he said. Mexico already has raised enough cash through debt sales to refinance US2.4 billion of 2006 maturities.
Mexico is seeking to diversify funding sources so that it can borrow at the lowest rates, Rodríguez said. The country raised 250 million Swiss francs (US196 million) through a bond sale in Switzerland in May, the first by a Latin American borrower since 1998, and another 750 million euros (US903 million) earlier this month. Rodríguez said he "typically" hedges non-dollar bonds into U.S. dollars, which account for most of Mexico's export revenue.
"This is a very smart strategy," said Mohammed El-Erian, who manages US23 billion of emerging-market debt at Pacific Investment Management Co. in Newport Beach, California.
"Mexico has reached a stage where it can pick and choose where to issue."
Mexico, which has the secondhighest credit ratings in Latin America after Chile, would join Austria and 18 foreign companies and agencies that raised C6.7 billion (US5.35 billion) through bond sales in Canada over the past year, according to Torontobased Bank of Nova Scotia. Moody's Investors Service rates Mexico's long-term foreign currency debt Baa1, the same level as Chile. Standard & Poor's has Mexico at BBB, the secondlowest investment grade rating and one level below Moody's.
"If they come, I'll certainly consider it," said Scott Colbourne, who manages US2.8 billion of bonds at AGF Funds Inc. in Toronto, including dollar- and peso-denominated Mexican government notes.
Canadian interest rates are lower than those in the U.S.
The Bank of Canada's benchmark lending rate stands at 2.5 percent, near the 43-year low of 2 percent it touched last year, and is 50 basis points below the U.S. overnight rate.
The government probably would pay today about 5.35 percent to borrow in Canada for 10 years, or 1.35 percentage points above the yield on Canada's treasury note due in 2015, said Bill Hastie, who oversees bond issues by governments at Bank of Nova Scotia. Investors demand an extra yield of 1.41 percentage points, or about 5.5 percent, to buy Mexican 10-year dollar bonds instead of U.S. Treasury notes.
The government paid 1.16 percentage points over the 10-year German benchmark yield, or 4.31 percent, to sell 750 million euros of 10-year bonds on June 7. The cost of the seven-year bonds sold in Switzerland was 3 percent, or 0.97 percentage point more than the seven-year swap rate in Swiss francs. Today, the government paid 9.46 percent to borrow 2.1 billion pesos for seven years at a weekly debt auction in Mexico.
The peso has risen 7.3 percent against the Canadian dollar this year, more than its 2.9 percent gain against the U.S. dollar. Today, the peso was little changed at 8.73 pesos to the Canadian dollar while it gained 0.2 percent against the U.S. dollar to 10.93 pesos per dollar on Tuesday.
Foreign companies and governments are selling debt in Canada to benefit from a government proposal to do away with restrictions on holdings of securities by non-Canadian issuers, said Hastie. Lawmakers may scrap a 30 percent cap on foreignissued securities for tax-sheltered pension funds as early as this month.
"We're at a stage in the evolution of the market where Mexico could do an issue in Canada," said Hastie. "Canadian investors are looking to add new names to their fixed-income portfolios."
Mexico gained visibility among Canadian investors after the North American Free Trade Agreement (NAFTA) took effect in 1994 and cut trade barriers among the U.S., Canada and Mexico, Hastie said. NAFTA as well as Mexico's membership in the Organization for Economic Cooperation and Development will help bolster Canadian demand for the country's debt, he said.
Kimco Realty Corp, a U.S. real estate investment trust, was the least credit-worthy issuer to tap the Canadian market in the past year. Kimco, which paid 4.45 percent to sell 150 million Canadian dollars of five-year bonds on April 14, is rated Baa1 by Moody's, the same as Mexico's. Standard & Poor's rates Kimco A-, two levels above its BBB rating for Mexico. |
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