Over the last two months a spring chill has gripped ABS issuance in Mexico, jeopardizing the country's reputation as the hottest domestic market in the emerging world. The interest-rate fears besetting the U.S. were bound to seep south, but the severity of buyside retrenchment from structured paper, nonetheless, is startling, given the bustling previous two quarters and the still-growing pipeline.
"This is the end of the cycle of easy money," said Tonatiuh Rodriguez, head of investment at Afore XXI, a pension fund party controlled by Prudential International Investments Corporation, with Ps28 billion pesos (US$2.5 billion) under management.
"Pension funds are much more cautious," he added.
The perfectly timed last hurrah came on March 31, when Corporacion Geo issued an accounts receivable deal for Ps172 million (US$15 million) via Banorte. That brought the combined deal count in the fourth quarter of 2003 and first quarter of 2004 to 20, for a total of Ps19.8 billion (US$1.7 billion). So far this quarter, not one transaction has closed.
Moreover, there's no meaningful pickup in sight. "We're going to be in this climate for a while," said one investor.
Investors have been parking their funds in short-term deposits and floating-rate government paper to ride out the volatility, which has slammed long-term paper particularly hard. Ten-year, fixed-rate Treasurys shot up roughly 130 basis points from early May to June. They have hardly eased since. For structured issuers in the pipeline with maturities beyond five years, a window is not coming anytime soon. "I think issuers are starting to shorten their horizons," said one Mexico City-based banker. "I don't think investors can stay out the market too much longer, but their appetite for long-term paper has clearly fallen."
And once issuance does return, floating-rate paper will reassert its historical dominance, sources said. The consensus was that it will be more difficult for fixed-rate deals to entice investors, even from such top-notch credits such as Mexican state mortgage provider Infonavit and credit agency Fonacot, which both tapped the fixed-rate curve in the first quarter.
Among issuers stuck in the pipeline until the storm blows over are toll-road operator Carreteras Cuota Puebla, housing developer Casas Beta, real estate finance company Credito y Casa and sub-sovereign Oaxaca. Combined, these issuers have about Ps1.8 billion (US$164 million) prepped for the market. Hipotecaria Nacional is expected to be registering its first RMBS shortly.
Farther down the road, local originators may face more competition for investor pesos as the door to foreign markets opens for Mexican pension funds. New rules timed to take effect later this year will allow the funds to allocate up to 20% of their fixed-income portfolio in paper denominated in dollars, euros and yen. "From now until December, we're changing our systems [to be able to invest abroad]," said Afore XXI's Rodriguez.
By opening up the previously forbidden foreign market to Mexican investors, regulators might inadvertently suffocate a nascent quasi-CDO industry in the country. Credit Suisse First Boston and Deutsche Bank Securities both registered shelves backed by cross-border paper. Usually these kinds of bond programs in Latin America seek to profit from arbitrage opportunities linked partly to rules barring local investors from investing overseas. With that rule lifted in Mexico, investors will be able to buy directly into the collateral that CSFB and Deutsche are repackaging.
Copyright 2004 Thomson Media Inc. All Rights Reserved.