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Samurai bonds boost Pemex liquidity

In September 2008, HSBC and SMBC arranged a ¥64bn private placement of bonds wrapped by a 97.5% political and 95% commercial risk insurance under the Japanese export credit agency (ECA) Nexi’s overseas untied loan insurance product for Mexico’s state-owned oil company Pemex.

This deal stands out in the market for a number of reasons. It is the first ever bond from a Mexican issuer with an ECA wrap, and also the first of this structure to be completed with Nexi. It is one of the largest such bonds to be issued to date, and had the longest tenor so far achieved, despite the unfavourable market conditions prevailing.

On top of these firsts, the deal represents a landmark transaction for Pemex. Sam Lippitt, director, HSBC project and export finance, elaborates: “The Nexi-wrapped structure facilitated Pemex’s first approach to the Japanese market for more than a decade, the Samurai market having been identified as an important new source of liquidity in the current environment.”

“The enhanced reception achieved by the ECA wrap allowed Pemex access to 12-year funding which, once swapped, was priced substantially below the trading level of their 10-year US dollar benchmark bond. The wrap also provided protection against the significant deterioration in the financial markets which took place over the course of 2008, which could have otherwise threatened closure.”

As an SMBC banker who worked close to the deal adds: “The deal was closed in September when the global financial market was in its most severe situation. Despite the long tenor and significant size, the deal was able to close in such a difficult time because the Nexi insurance was structured in a way that made investors comfortable to buy bonds. It was also issued in the Samurai bond market where investors were still active.”

The bond was issued by the Pemex Project Funding Master Trust and guaranteed by Pemex. The trust vehicle was used as the issuer to allow the borrowing to be compliant with the Mexican pidiregas law.

The funds raised are being used to finance Pemex’s ongoing investment in its exploration and production activity in the Ku Maloob Zaap offshore oilfield in the Gulf of Mexico.

Pemex requires significant volumes of funding to support its ongoing oilfield development programmes, and is increasingly looking at ECA financing as an attractive means of obtaining long-term finance for a part of this expenditure.

The principal risk of this transaction for all parties involved was to successfully manage the syndication during a period of pronounced market volatility.

“The export credit structure assisted significantly in this regard, as did the importance of the Pemex relationship to key institutional investors, and the strong execution skills of the arranging team,” comments HSBC’s Lippitt.

He adds: “An additional risk for the client was one of currency mismatch, as Pemex’s Capex expenditure and income is primarily US dollar denominated.  To combat this, HSBC put in place a cross currency interest rate swap to convert floating yen into fixed US dollar funding.”

Pemex is 100% owned by the government of Mexico. It is the world’s sixth largest crude oil producer and its contributions to the Mexican economy are very high, with its earnings roughly equal to one third of the Mexican federal reserves.

Deal Information

Borrower: The Pemex Project Funding Master Trust
Amount: ¥64bn
Lead arrangers: HSBC; Sumitomo Mitsui Banking Corporation (SMBC)
Additional participants: HSBC; SMBC; Mizuho Corporate Bank; Bank of Tokyo-Mitsubishi UFJ; Sompo Japan Insurance
Funding Rate: Yen Libor + spread
Law firm: Linklaters
Tenor: 12 year (bullet)
Date signed: September 2008