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Posted on April 18, 2011
Alfa SAB, Mexico’s second-largest industrial conglomerate, is lining up its second dollar bond sale of the year as the record rally in the peso drives down overseas financing costs for corporate borrowers.
Petrotemex SA, Alfa’s petrochemical unit, plans to sell bonds abroad this year for the first time since 2009, Chief Financial Officer Ramon Leal said on April 14. Sigma Alimentos SA, the food unit of Alfa, sold $450 million of seven-year bonds to yield 5.77 percent on April 7. The average yield on Mexican corporate dollar bonds tumbled 142 basis points in the past year to 6.30 percent, according to JPMorgan Chase & Co. (JPM) Brazilian corporate dollar debt yields 5.98 percent.
Record Mexican exports have helped drive the peso up 5.4 percent this year, extending its two-year advance to 12 percent and making it cheaper for companies to repay dollar-denominated bonds. Mexican companies have sold $4.7 billion of international debt this year, up 96 percent from the $2.4 billion they issued during the same period in 2010. Companies from Brazil have raised $17.3 billion in the overseas bond market this year.
“For a company that generates revenue in peso, you can get long-term funding at very attractive rates,” Juan Cruz, an emerging-market corporate debt analyst at Barclays Plc, said in a telephone interview. “Companies can go to market in dollars with a good yield and a tenor of 10 years, giving them flexibility.”
The yield on Petrotemex’s dollar bonds due in 2014 sank 401 basis points, or 4.01 percentage points, since the company sold the securities in August 2009 to 5.74 percent as the global economic recovery fueled demand for emerging-market assets, according to data compiled by Bloomberg.
Petrotemex plans to sell bonds abroad instead of locally because it can obtain a lower rate and longer maturity, Leal said in an April 14 conference call with reporters. The average yield on corporate fixed-rate peso bonds issued this year is 8.48 percent, or 218 basis points above dollar debt, according to data compiled by Bloomberg and JPMorgan.
Fixed-rate sales have accounted for 83 percent of local bond offerings this year while the rest have been at floating rates tied to the central bank’s 4.5 percent overnight loan target, according to data compiled by Bloomberg. Companies have sold 54.3 billion pesos of floating-rate bonds this year, the fastest start to a year on record, according to data compiled by Bloomberg.
“We’re now leaning toward financing in the U.S. market, which allows us to have lower costs,” Leal said. “We see, from the talks we had with investors, a lot of appetite for solid companies like the ones we have. The window will be open during this year for us to go to the market.”
Petrotemex will likely pay a higher interest rate on its bonds than Sigma because it is lower rated, Leal said.
Sigma is rated BBB- by Standard & Poor’s, the lowest investment grade and two levels higher than Petrotemex.
The peso fell 0.4 percent to 11.7116 per U.S. dollar at 8:44 a.m. New York time.
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell 1 basis point 136 today, according to JPMorgan.
The cost to protect Mexican debt against non-payment for five years fell 1 basis point on April 15 to 100, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
Yields on the interbank rate futures contract due in September climbed 1 basis point on April 15 to 5.06 percent, indicating traders expect a rate increase that month. In the past five years, the gap between the 28-day TIIE and the overnight rate has averaged 36 basis points.
The central bank kept its benchmark interest rate unchanged at a record low of 4.5 percent on April 15.
The prospect of higher interest rates in the U.S. means Mexican companies may have a limited “window” for selling bonds overseas, said Roy Yackulic, a corporate debt analyst at Bank of America in New York.
Traders see a 29.4 percent chance that the Federal Reserve will boost its overnight lending rate target at its December meeting, up from 26.4 percent odds last month, trading in fed funds futures shows. The Fed has held the rate at zero to 0.25 percent since December 2008.
“People get nervous about when the U.S. will raise rates and maybe that window won’t be there,” Yackulic said in a telephone interview.
Cemex SAB, Banco Bilbao Vizcaya Argentaria’s Mexican unit and Empresas ICA SAB have sold bonds in international markets this year. The $2 billion offering by BBVA’s unit matched the biggest Mexican corporate bond sale on record. Yields on the bank’s 10-year notes have fallen 21 basis points since the sale last month to 6.24 percent.
“The companies are trying to take advantage of low rates globally, not just locally,” Javier Belaunzaran, who helps manage about 40 billion pesos of fixed-income debt at Interacciones Casa de Bolsa SA, said in a telephone interview from Mexico City. “Interest rates are so low that any offering in dollars is going to be relatively attractive.”
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