NEW YORK, Dec 7 (IFR) - Bonds that helped finance a new airport project in Mexico, which the country now plans to shelve, initially rallied sharply following an offer to buy back almost a third of the debt.
The Mexico City Airport Trust, or Mexcat bonds, have been under pressure ever since newly elected president Andres Manuel Lopez Obrador (AMLO), who took office this month, said the US$13bn airport project would be cancelled.
But the tender offer, for US$1.8bn of the US$6bn bonds, triggered an initial relief rally as it offers investors a chance to reduce risk quickly in the debt at a reasonable price.
"The market has responded positively to the news as it is a sign of a pragmatic AMLO tacking back towards the centre after several weeks of populist rhetoric."
The biggest jump was in the 2046 and 2047 bonds which soared to around 85 cents on the dollar, or about 10 points higher than where they were hovering on November 30, one trader told IFR.
The 2026 bonds jumped about 7 points to 89 cents, while the 2028 bonds rallied 9 points to 87 cents.
"The big takeaway is that this is a positive for Mexico risk overall even though the negotiations for Mexcat are by no means a done deal," Roger Horn, senior EM strategist at SMBC Nikko Securities America, told IFR.
"There is a recognition that it's not the intention to force losses on bondholders, and it is also happening a lot more quickly than people expected."
By Thursday, however, while the shorter-dated bonds had edged back to about 85, the longer-dated bonds were trading around 81.75.
The erosion of some of the gains followed a call by some analysts for investors to push back on the terms.
Law firm Hogan Lovells, which is representing some of the bondholders, also said a group of investors owned more than 50% in principal amount of at least one series of the Mexcat bonds.
"The Mexcat adhoc bondholder group was not consulted by the issuer in advance of the dissemination of Mexcat's tender offer and consent solicitation, but has now reviewed it, and has some concerns such that it cannot support the proposal in its current form," Hogan Lovells said.
Shamaila Khan, a director of emerging market debt at AllianceBernstein, said that bondholders who tender for the bonds, even if they are not completely taken out, would be giving up their claims to an event of default.
Fees from the existing and planned new airport are pledged to the trust that issued the US$6bn Mexcat bonds. Cashflows from those fees were intended to refinance the bonds at their respective maturities ranging from 2026 to 2047.
But the buyback is contingent on a majority of bondholders agreeing to consent to the amendment of covenants.
If they do so, bondholders will have weaker protections as they will give the issuer the right to remove collateral from the original airport financing package and potentially change default language, Citigroup analysts said.
The intention is to remove the risk of acceleration due to cancellation of the new international airport by making it clear that cash flows supporting the bonds will be (just) the existing airport, said Horn.
"They want to act quickly to preserve the investment-grade ratings, and secondly, all this noise has caused the sovereign bonds and Pemex to drop," Horn told IFR.
"Both have to come to the market next year, and this may mean they don't have to pay up as much."
Investors have two options, said Roger King, an analyst at CreditSights. They can tender their bonds in the Dutch auction, and in doing so would consent to changes in the covenants. Or they can consent to the covenant changes and not tender.
"They're being pretty aggressive because as a bondholder you are consenting to everything whether the bonds are taken out or not," said King.
"It makes it easier for the issuer to get a 50% take-up from bondholders, which is what they need to push the changes through."
In a Dutch Auction the lowest bids are accepted first.
"These kind of auctions create a bit of tension. Some people may get spooked into putting in a lower bid," said one investor, as only a third of the bids will be accepted, he added.
Bondholders can submit their notes for repurchase at a price between 90 to 100 cents. The tender offers expires at midnight on January 2, 2019, and the consent solicitations expire at 5pm on December 17, 2018.
The issuer will accept a maximum of US$300m of the 2026s, 2028s and 2046s, and US$900m for the 2047s. Those that participate will receive a consent payment of US$7.50 for every US$1,000 principal amount of notes that are accepted for tender.
"It is way too early in the process for any bondholders to give up bargaining chips (restrictive covenants) until a global solution is in place," said King at CreditSights.
"Many scenarios remain in play, some more favourable to bondholders. Not consenting saves an important seat at the table under (different) scenarios."