Mexico's President Stays Silent on Pledge to Scrap $13 Billion Airport

(Bloomberg) -- Andres Manuel Lopez Obrador pledged to cancel a $13 billion airport countless times when he was a candidate and then as Mexico’s president-elect. But now that he’s taken office, the leftist politician is conspicuously silent on the matter.

That’s because any government statement about scrapping the project could open the door for investors to declare an event of default on $6 billion of overseas bonds tied to its construction and demand immediate repayment. So the normally verbose Lopez Obrador, who prides himself on transparency, was notably evasive with journalists Monday.

Mexico's President Stays Silent on Pledge to Scrap $13 Billion Airport

It’s part of his administration’s strategy to placate investors who loaned money for building a new Mexico City hub and have since been told that the project isn’t going to happen, sending prices for Mexican assets plummeting as analysts questioned whether the new government is committed to business-friendly policies. Officials on Monday unveiled an offer to buy back as much as $1.8 billion of the securities and create a revenue stream to repay the remaining notes, but it can only happen if a majority of investors agree to scrap the covenants that allow them to demand their money back if the airport is canceled.

“This issue with bondholders reveals just how complicated it will be to execute what Lopez Obrador wants,” said Benito Berber, the chief Latin America economist at Natixis. “These legal ramifications and mixed signals are part of the AMLO risk premium we’re seeing in the market.”

Mexico's President Stays Silent on Pledge to Scrap $13 Billion Airport

The proposed changes would allow funds that pay the bonds to come from the current airport alone. But modifying the covenants would remove a key bargaining chip for investors, who could demand the full accelerated payment with the support of holders of just 25 percent of the bonds upon event of default. Roger King, an analyst at CreditSights, recommended in a note that investors reject the proposal to retain their seat at the negotiating table.

The government’s offer to repurchase the notes for 90 to 100 cents on the dollar will stand until Dec. 10, according to Deputy Finance Minister Arturo Herrera. Investors who sell back their bonds quickly will get an additional payment of 5 cents on the dollar, while those who agree to the amendments but hold on to the notes will get a one-time “consent payment” of 0.75 cent on the dollar. Most of the notes now trade for about 85 cents on the dollar.

Mexico's President Stays Silent on Pledge to Scrap $13 Billion Airport

Bondholders had already organized before Monday’s proposal and Hogan Lovells as a legal adviser, with plans to name a financial adviser soon. An official at Hogan Lovells didn’t respond to a request for comment on the government’s proposal.

All of this leaves Lopez Obrador playing for time to see if the offer can tempt investors to give up their rights in exchange for a quick cash infusion.

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