Bonds for Never-Built Mexico Airport Bring Investors 50% Gains

To money managers, bonds tied to a failed airport project in Mexico increasingly look like a sure thing.

(Bloomberg) — To money managers, bonds tied to a failed airport project in Mexico increasingly look like a sure thing. 

The Mexico City Airport Trust bonds raised money starting in 2016 to build a new airport serving the nation’s capital, a project that President Andres Manuel Lopez Obrador canceled in 2018. But the securities are backed by passenger fees from the existing Benito Juarez International Airport. 

Those fees have been rising as international air travel rebounds, helping the so-called Mexcat 30-year bonds surge by around 50% since late September. That makes them the best-performing Mexican corporate notes over that period, accounting for both price changes and interest payments. The spread on the bonds due 2047 relative to comparable dollar-denominated Mexican government debt has narrowed to its lowest since issuance. 

The bonds have jumped further over the past month, after AMLO said he wants the navy to take over operation of the airport. 

The comment has made investors hopeful that Mexico will start to buy back some of the $4.2 billion total of bonds tied to the project, or offer a full guarantee to replace the payments based on passenger fees, said Aaron Gifford, an emerging-market sovereign debt analyst at T. Rowe Price in Baltimore. A guarantee could be riskier for the government, since it could lead to holdouts, while an early repurchase would be more promising, he said. 

“I think the government has the desire and ability to do the transaction, so I think there’s more upside in the bonds,” Gifford said.

The airport has been generating more fee income that is earmarked for buying back debt. Even still, the precise steps that the government takes next are hard to forecast, said BBVA credit strategist George Ordonez. He had recommended going overweight in the airport bonds last month. After the latest rally, he said investors were likely looking to take profits in the absence of a clear plan from the government.

“With most investors, there’s confusion,” Ordonez said. 

Possible Buybacks

Buying back the bonds will probably force Mexico to pay more than face value given provisions in the debt that require the nation to make investors whole for lost yield if the debts are repurchased, T. Rowe Price’s Gifford said. 

Mexico City Airport bonds with a 5.5% coupon due 2047 traded on Thursday at a spread of about 251 basis points over US Treasuries, after starting the year closer to 365 basis points. They yield around 6.44%.  

AMLO is looking to hand over control of the airport as part of a move to expand the military’s oversight of key parts of the nation’s infrastructure. The president didn’t provide a timeline when he was discussing the plan last month. Other officials have been signaling that the navy is reluctant to take over as long as fees from the airport are going to bondholders, which may force the government to think about how to restructure or retire the debt. 

Trapped Cash

When the existing airport generates more passenger fee income than necessary to pay operating expenses, up to $200 million per year can be set aside to pay down principal. The trust’s principal accumulation account has likely risen to more than $750 million by the end of June, from $671 million at the end of last year, according to BBVA’s Ordonez. 

Those funds are earmarked for eventual buybacks, said Aayush Sonthalia, a portfolio manager at PGIM Fixed Income, who holds the debt.

“We have found this bond quite attractive over the last few quarters,” he said. “There’s a lot of cash being trapped in the structure and they will be required to use that to retire the principal.”  

Passenger volume at the airport has been rising this year, up about 11% for 2023 through the end of May. International air travel revenues have broadly been surging in 2023 due to pent-up demand after the pandemic. The airline industry’s main global trade group last month doubled its estimates for net profits for carriers, citing factors including growing demand in North America.   

Some investors get comfort from the legal documents for the airport bond, which offer clear covenants and spell out investors’ safeguards. The government is unlikely to take any steps for the global bond that could trigger a default, said Alejandro Di Bernardo, a portfolio manager at Jupiter Asset Management. Doing so could undermine other Mexican quasi-sovereign credits, like state-run oil company Pemex, he said. 

“Whatever the Mexican government offers to investors, we don’t think it’s going to deviate too much from something reasonable,” he said.

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