Towards the end of April, Mexico’s central bank, Banxico, announced a USD31bn stimulus package. The central bank said the move is aimed to “foster an orderly behaviour of financial markets, strengthen the credit channels and provide liquidity for the sound development of the financial system.” This package, coupled with previously announced fiscal injections amounts to roughly 3.3% of 2019 GDP. Banxico also announced an unscheduled 50bps cut to the overnight funding rate, to 6%. The unanimous decision to cut suggests the board is now more aligned and prepared to counter the negative impact of covid-19 on the economy. Importantly, Banxico still has a fair amount of monetary ammunition, and more fiscal scope than many of its LatAm peers, due to significantly lower debt levels.
On that, Mexico’s Ministry of Finance issued one of the country’s largest multi-tranche deals at a combined USD 6bn. The three-tranche bond issue was made up of: a USD 1bn, 3.9% coupon bond, maturing in 2025 at a spread of 375.9bps over USTs, a USD2.5bn, 4.75%, 2032 bond at 437.8bps over, and a USD 2.5bn, 5%, 2051 bond at 427.2bps over. Minister Arturo Herrera commented on Twitter saying: "This measure helps consolidate the [government's] funding sources, guarantees resources to face the crisis derived from #Covid19, as well as operate programs and attend any future adversity”. The deal was ~4.2x oversubscribed, which indicates investor sentiment in the nation’s credit remains robust. Unlike many inventors who were pulled in by the attractive yields on offer, we did not participate in the deal as, for example, the Baa1/BBB/BBB- rated bond maturing in 2051 is currently offering a yield and return of 15.6% but is trading with less than one notch of credit cushion.
Coupled with the Covid-19 effect, oil prices have shocked globally, in LatAm, Mexico and Colombia have been particularly vulnerable. As such the Mexican government announced a series of measures worth USD4.55bn to support the state-owned oil giant, Pemex. According to a letter to investors from the company’s CEO and CFO, the fiscal boost from the government will be used to lower Pemex’s investment burden this year, as well as help the company focus on low cost production fields. "Due to the increase in production from our new oil fields, where production costs are below $5/b we will be able to efficiently manage our production portfolio and prioritize lower cost production, in order to comply with the international commitments assumed by our country," the letter stated. Focusing on low cost production will also reduce the requirement for importing oil; according to sources the company imports up to 70% of its 800,000 bpd gasoline consumption, predominantly from the US.
Pemex bonds have continued recovering from their indiscriminate sell-off following the notch downgrades by all three major rating agencies in March and April. The BBB/Ba2/BB- rated 7.69% 2050 issue has bounced ~15 points off the year lows and continues to offer very attractive risk-adjusted returns and sufficient notch cushion. Even using the lowest rating BB- the bond remains 1.50 notches cheap with a return and yield of 15%. Although selling had been prevalent with the potential loss of investment grade status for Pemex, a reduction in market volatility is likely to lead to demand from investors looking for a “high yield” and this will encourage support. We intend to retain our positioning as the pricing and yield are attractive given our read on the current financials of Mexico and Pemex, and very clear government support.