Nearly four years ago, MBIA hit Mexico's peso market, the first monoline to do so. It gave extra vroom to a toll road deal, which priced tighter than any domestic triple-A corporate or ABS before it. The message was clear. Mexican buysiders liked a good wrap.
But they had a first love: government paper. The wrap was attractive, yes, but not enough to wreck such a solid relationship. It turned out that the toll road deal priced wide of Mexican treasurys, paying bondholders an extra 24 basis points over, even though government bonds were effectively rated at the Mexican sovereign, quite a distance from the wrap's global triple-A.
That's okay, said wrappers and their banker buddies. Investors will come around and see wrapped deals for what they are: far lower risk than local treasurys.
Fast forward to four years later. A handful of monolines have joined MBIA in Mexico, and originators in the real estate business, the motors of the marketplace, have decided they like wraps, too. So how's pricing going vis-a-vis government paper?
At last count, not so different from 2003. In October, GMAC Financiera priced a FGIC-wrapped RMBS at 44 basis points over the government's Udibonos, while an Ambac surety for Patrimonio's RMBS in November garnered a spread of 39 basis points over. And Mexico still sits well below triple-A.
So what's up? Foremost, there's the perennial question of liquidity and on that front, Mexican treasurys beat any other domestic paper hands down. In fact, there really isn't much of a secondary market for any nongovernment bonds in the peso market.
Sure, it's tough to change Mexican investors' mindset that government paper is simply unbeatable, but it's not all about locals' affection for treasurys. There's cold, hard economics behind the spread. "If I buy a wrapped bond abroad and swap it back into pesos, the yield's going to be higher than government paper," said one Mexican investor, who also pointed to the credit risks in, say, an RMBS, that a wrap doesn't eliminate.
More wrapped deals are in the peso pipeline. And when they're pitched as the lowest risk around, one can imagine that the message from buysiders isn't going to change much. "We like you. We really do ... but let's just be friends."
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