Pemex sells Latin America's biggest corporate bond

September 23, 2004 -- Petroleos Mexicanos, Mexico's state- owned oil company, raised $1.75 billion in the biggest bond sale ever by a Latin American company, taking advantage of a four- month debt rally to lock in borrowing costs.

The sale was also the first ever by a Latin American borrower of so-called perpetual bonds -- securities that have no set maturity, said Merrill Lynch & Co., which helped manage the sale. The bonds, which will yield 7.75 percent, have an option that allows Pemex to buy them back after five years.

Pemex received bids of about $5 billion for the bonds, underscoring how a rally in U.S. Treasury bonds has driven investors throughout the world to seek out higher returns in securities such as emerging-market debt. Pemex targeted Asian investors and managed to sell about 65 percent of the bonds to them, said Jack Gunn, Merrill Lynch's head of debt syndication for Asia Pacific.

``Investors are searching for yield, particularly in Asia,'' Gunn said in a telephone interview from Tokyo. Asia's ``strong economy and high saving rates is creating high liquidity. At the same time there is relative scarcity of investment grade.''

The U.S. bond rally has sparked a 15 percent gain in emerging-market bonds since May 10, cutting the average yield to 8.2 percent from 9.9 percent, according to JPMorgan Chase & Co.'s EMBI Global Diversified Index. The yield premium on developing country bonds over U.S. Treasuries dropped to 4 percentage points from 5.1 percentage points, according to the index.

Locking in Costs

The price on Pemex's bond due in 2027, the company's longest maturity until today's sale, has jumped 14 cents on the dollar since May 10 to 123.2 cents. Its yield has fallen 1.19 percentage points to 7.39 percent.

Dipankar Shewaram, who manages fixed-rate securities at BlueBay Asset Management in London, said Pemex joins other companies in locking in lower borrowing costs amid the rally.

``Across the board, CFOs are taking advantage of lower yields to manage their balance sheets,'' said Shewaram, who bought some of Pemex's bonds for the funds he manages. He declined to say how much he bought or how much money he manages.

Emerging-market governments probably will raise $52 billion from international bond markets by yearend, the most since 1997, Fitch Ratings said in a report this month.

Call Option

Today's sale ranks among the largest throughout emerging markets, matching the $1.75 billion sale of 10-year notes by Russian gas company OAO Gazprom last year. The biggest developing- country corporate bond sale came from Malaysian state oil producer Petroliam Nasional Bhd., which sold $2.73 billion of bonds in May 2002, Bloomberg data shows.

Buyers of the bonds expect Pemex will look to use the option it has to buy back the debt after five years to borrow at a lower rate as its credit ratings improve and Mexico's economy becomes more integrated with that of the U.S., said Frank Zheng, an analyst at JPMorgan Chase & Co. in London.

``These perpetual bonds are very rare,'' Zheng said in a phone interview. ``It demonstrates stronger faith in Mexico and Pemex.''

A Pemex spokeswoman declined to comment on the sale.

Pemex's foreign bonds are rated Baa1 by Moody's Investors Service, the third-lowest investment grade, and BBB- by Standard & Poor's, the lowest investment grade rating. Pemex in June sold $1.5 billion of floating-rate notes, its previous biggest sale.