Times are good, or at least better, in Mexico. The country's economy showed remarkable resilience to external shocks through the Asian crisis of1997, the Russian default in the summer of 1998, and the Brazilian devaluation early last year.
The economy has benefited from sustained export-led growth, with Mexico's production increasingly integrated not only with that of the U.S. but also on a global scale. As a result, Mexican spreads have performed better those of any country in the region.
Thanks to this positive outlook, plus peaceful elections and handover of power, Moody's Investors Service awarded Mexico investment grade ratings and Standard & Poor's is said to be considering a similar move in the near future. S&P has also placed a full-time structured finance analyst in Mexico City.
Higher Ratings: Less Cross-border Deals?
Besides oil giant Petroleos Mexicanos's $7 billion securitization program, several other Mexican corporates have become regular issuers in the international capital markets. Two of the country's largest banks - Bancomer and Banco Nacional de Mexico (Banamex) - have placed over $1 billion worth of credit-card securitizations with foreign investors since 1996. Banamex is currently working on a deal for approximately $250 million backed by electronic remittances. Other cross-border issuers include glass product producer Vitro and cement maker Cemex.
But what does the improved ratings mean for securitization? Several sources believe that the upgrade, coupled with more favorable conditions in the local markets, will lure long-time issuers of cross-border securitizations to corporate bond deals.
"Doing international ABS transactions is getting increasingly expensive vis a vis corporate issues," said Fatima Perez, director at Banorte, a frequent issuer of credit-card securitizations. "This year we are going to do just one structured deal as opposed to the two we did last year."
Others feel that the advantages of structured deals will continue to be appealing. "I would agree with those who argue that higher ratings will reduce the flow of cross-border securitizations," said a London-based banker. "But I believe that both issuers and investors still see an added value in asset-backed paper. From an issuer's perspective, straight debt appears in the issuer's balance sheet and consequently worsens their debt ratios, while structured paper doesn't. From an investors point of view, buying Latin paper that is backed by existing assets offers a lot of comfort."
Local Market Warms up
Though still in its early stages, Mexico's domestic securitization market is picking up steam. The improved economic scenario laid the groundwork for pioneering deals such as Grupo Elektra's and others are slowly following suit. Corporacion Geo, for example, placed P133 million ($14 million) in bonds backed by construction receivables in March, and is currently mulling another securitization of around P250 million.
"We are about to see a real domestic securitization market," said Eugenio Lopez from Fitch in Mexico. "But before that happens issuers and investors need to get more familiar with the instrument. It is happening, the market is maturing but it will not happen overnight."
Higher credit ratings and better market conditions need to be accompanied by appropriate laws and regulations. "There have been many important changes," said Lopez. "A couple of months ago a new law framed the concept of SPVs and their role in ABS deals. In addition, there is now a tax break for paper that features maturities of three years and longer, which stimulates the issuance of notes with longer tenors."
Undoubtedly, more legislation is needed. Right now, however, the biggest legal issue is a lack of consistency. "Each Mexican state sanctions its own laws which in many cases creates an uneven legal environment," explained Jose Ramon Tora from S&P in New York. "If you want to group together mortgages from different states, for example, you might run into problems because the laws that apply are different. This is slowing down issuance."
Mortgage securitization is also a thorny project. Earlier this year Hipotecaria Su Casita, a local non-bank mortgage lender or Sofol, launched the country's first MBS transaction. Though small in size (75 million UDI, which are units pegged to inflation) the deal was very significant for the market.
Mexico's 14 Sofoles (Sociedades Financieras de Objeto Limitado) are seen as key components for the development of a secondary mortgage market in Mexico and have been encouraged to issue MBS deals by a government keen to diversify funding for the middle-income housing sector.
Throughout the 1990s the development of a secondary mortgage market in Mexico was delayed by a combination of legal and structural hurdles. The government requires a complex filing procedure and subsidizes mortgage loans. The loans were also indexed to both inflation and the minimum wage, which resulted in an erratic payments schedule.
But things have slowly changed. "The securitized mortgages from Su Casita had a low loan to value ratio, which is very different from the way things were done before," said Gabriel Pelusi, analyst with Fitch. "The Sofoles used to provide up to 90% of the funding, which resulted in little incentive for home owners to pay their mortgages. For this transaction they picked mortgages that cover only 60% of the property. In addition, they securitized mortgages granted to middle and upper-middle class families, which are in better economic shape and more likely to pay on time."
Despite the positive outlook, there still is a long way to go. "Right now deals are very small in size," said Tora. "That makes them unappealing to the big pension funds who are looking for larger amounts to invest in."