Capital Markets Weekly: Mexico City airport-bond restructuring potentially unresolved despite favorable tender
This week's main developments relate to bondholder reaction to revised adjusted terms for USD6 billion of project debt related to Mexico City's airport project - recently cancelled by its new government - and initial moves by five funds holding defaulted Venezuelan debt to start acceleration procedures.
Mexico Airport favorable tender
On 19 December, Mexico achieved considerably better-than-expected results with a tender for USD1.8 billion of debt of the USD6 billion of project bonds issued to help fund the cancelled new airport at Mexico City. The tender was based on new government proposals issued on 11 December which proposed to repurchase USD1.8 billion at par, rather than at the 10 percentage point haircut initially offered, while improving some other covenants on the outstanding liabilities.
This initially was opposed by a bondholder group, the MexCAT Ad Hoc Bondholder Group, representing around 50% of the bonds,-which claimed that that "fundamental problems" remained with the revised offer. In particular it highlighted inadequate revenue streams to redeem the debt on maturity, claiming a shortfall of up to 50% of principal due. Nevertheless, on 19 December, Mexico's Treasury announced that the revised offer had received "an overwhelming majority" of the bonds, and that this included "a substantial majority" in each of the outstanding debt issues. According to the Financial Times, a total of USD4.3 billion of the debt accepted the revised terms (65% of those bonds due in 2026, 60% of the 2028 issue, 75.5% of bonds due in 2046 and 75.5% for those maturing in 2047).
Venezuelan acceleration move
On 17 December, Reuters reported that five funds owning USD380 million nominal value of Venezuela's 2034 outstanding issue have contacted the fiscal agent requesting acceleration (early repayment at par) due to non-payment of interest. A legal representative of the group claimed that since the "Republic has stopped paying on the bonds and is in default", the group have "exercised their contractual rights to protect their interests". The approach to the fiscal agent is a formality prior to potential legal action.
Our take
In our view Mexico's new administration has harmed the country's market standing by cancelling the project to build a new airport for Mexico City, and by making an initial approach to bondholders that offered a ten percentage point haircut on just 30% (USD1.8 billion) of the USD6 billion of bonds already issued for the project.
Its latest proposals offer par redemption for the USD1.8 billion to be repurchased and improve covenants, but this does not make bondholders "whole". The cleanest solution, used by Spain for its ill-fated Castor gas storage project off the Mediterranean Coast, involved state intervention to repay bondholders in full.
The tender results on 19 December were considerably better than expected, with a majority of bondholders accepting the revised terms, and prior opposition clearly fracturing. At this stage, however, it remains unclear how the concerns of those opposed will be addressed, and exactly how the USD4.2 billion of untendered bonds will be serviced through their lives. According to Bloomberg, the tender result is a "win for the government" and that "by accepting the offer, bondholders have waived" the right to seek to declare default. However, other sources suggest that continued negotiations will be needed, with bondholders potentially seeking a government backstop for the outstanding debt. One contribution in "El Financiero" newspaper suggested that the process could take another six months to reach definitive agreement and up to a year before the debt has been completely adjusted or redeemed.
This leaves the risk that the dispute could remain unresolved during the first quarter of 2019, when Mexico was expected to issue up to USD8 billion of sovereign-level debt to fund its 2019 deficit. Continued public disagreements with bondholders could damage Mexico's market reputation and in the worst case could trigger a delay in issuance, hindering Mexico's funding of its 2019 deficit, or increase its cost significantly.
The move by five Venezuelan bondholders appears to end the extended truce between the defaulted country and its international investors. Venezuela has accrued arrears of some USD8 billion on USD60 billion of state-level and PDVSA obligations. Its sovereign bonds have been trading at 70% discounts while PDVSA liabilities have been worth just 20 percent of their nominal value showing clear investor awareness that Venezuela lacks the resources to cover its liabilities. A legal action by a single group to seek acceleration is likely to trigger multiple parallel claims from other bondholders, to avoid preferential rights to repayment. In turn, a long and painful legal would follow, with minimal scope for bondholders to achieve repayment without very sizeable write-offs.