Mexico has long been one of the most innovative sovereign issuers when it comes to liability management. Now, the sovereign has become the first developing nation to sell warrants, allowing investors to exchange foreign debt with local.
Three warrants were sold in all, for $65 million, each one to international investors. And each warrant granted the holder the right to tender Mexican dollar-denominated debt in return for a peso-denominated Bono.
The $2.5 billion deal, lead managed by Credit Suisse and JPMorgan, is extremely clever on many levels. First, Mexico can raise money now by selling the warrants without increasing its indebtedness. Second, given that the warrants are worth money, it’s safe to assume they will be exercised. Once that happens, Mexico will have less foreign debt and more domestic debt, making the country more creditworthy. Third, the deal smooths out the hedge fund front-running that is common when countries do bond swaps. If Mexico had simply announced a large dollar-for-peso bond exchange, the price of dollar bonds would have risen and the price of peso bonds would have fallen, damaging the Mexican domestic yield curve.
This way, the end result is the same, but there’s much less market disruption along the way.