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CASE STUDY: Terrafina Prices Benchmark Bond Below 5% as Mexican Real Estate Charms Markets

Terrafina, one of Mexico’s top real estate investment trusts, issued a USD500mn 10-year senior unsecured international bond that saw 5x oversubscription at peak and priced at an impressive 4.962%, joining a spate of issuances from the real estate sector – one of the busiest in terms of volumes in Mexican fixed-income.

Sep 19, 2019 // 2:21PM

Deal At A Glance
Deal Type: International Bond
Deal Structure: 144a/RegS, Senior Unsecured
Issuer: Terrafina
Deal Size: USD500mn
Issue Date: 15 July 2019
Tenor: 10-year
Coupon: 4.962%
Price: 100.00%
Yield: 4.962%
Spread: T+287.5bp
Issuer Rating: Baa3 / BBB
Governing Law: English Law
Location: Mexico
Listing: Irish SE
MLAs/ Bookrunners: Citi, BBVA, Barclays, JP Morgan
Legal Adviser to Issuer: Cleary Gottlieb, Criel Garcia
Legal Adviser to Investors: Galicia Abogados, Davis Polk
Use of Proceeds: Partial repayments of certain loans (including the notes due 2022)

Background

Terrafina is a Mexican real estate investment trust formed primarily to acquire, develop, lease and manage industrial real estate properties in Mexico. Its portfolio consists of strategically located warehouses and other light manufacturing properties throughout the Central, Bajio and Northern regions of Mexico.

The REIT’s objective is to provide constant risk-adjusted returns for the holders of its certificates through stable distributions and capital appreciations, which it aims to do through successful performance of its industrial real estate and complementary properties, strategic acquisitions and access to a high-level of institutional support.

While attending a financial conference earlier this year, the Treasury team was quoted an indicative price for bonds that rather surprised them; after further conversations with investors, who expressed an appetite for “no new money” issuance, and with 85% of its debt maturing in Q4, the company decided to perform an extensive liability management exercise that had to be carefully timed.

In July 2019, despite the shock resignation of Mexico’s Finance Minister resonating through the markets, Terrafina found an opportune window to launch a tender offer for its existing bond and issue new USD500mn notes at a significantly tighter spread, aided by ample liquidity in the market and a scarcity of issuances out of the region at the time.

Transaction Breakdown

Having made the decision to return to the bond market, Terrafina’s management began arranging meetings with its partner banks alongside its external advisor, PGIM Real Estate. On the back of those discussions it put together a target list of four experienced and trusted lenders to bring on board: Citi, BBVA, Barclays, and JP Morgan.

During the roadshow the company had to fend off some uncomfortable questions relating to “country risk” in Mexico, including the recent departure of the Finance Minister and broader uncertainty around AMLO’s administration; the cancellation of the airport project and the new refinery; and a lack of progress in the USMCA negotiations. It successfully argued that one of the company’s key strengths is its close connection with the US economy and a bulk of clients with dollar revenues.

Still, demand remained strong during the roadshow, peaking at 5x oversubscription, and the initial price expected at 300bp above the UST reference point (IPTs of 5.25%) soon narrowed below 5%, representing a tightening of 30bp. The tender offer had over 80% success rate, according to the Treasury team.

Strong demand and solid pricing provided the opportunity to upsize the deal, but Terrafina only needed USD500mn and resisted the temptation, thus opening up room to pre-pay in the future.

One of the key goals in this issuance was to attract institutional investors and private banks, and the dealmakers were able to secure a remarkable share of 60% for those types of accounts; 30% of the notes were placed with national and international banks, and another 10% with brokerages.

By geography, 40% went to local investors, while the remaining 60% were distributed between US, European and Asian investors.

Following a spate of acquisitions over the past two years, Terrafina is now in consolidation mode, looking to potentially offload some strategic assets, and is putting together a portfolio of properties worth USD100-150mn by start of 2020.

With occupancy levels at 95%, the company’s main goal is to maintain high performance of its assets, keep close communications with tenants (who mostly consist of international businessmen, largely working for manufacturing exporters) regulators, and industry bodies – including the ANI FIBRA, an association of REITS.

Deals Latin America Mexico

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