Defying signs that a domestic currency transaction would breezily seize the award for Latin American Deal of the Year, the honors instead went to a cross-border deal: Metrofinanciera Trust 2005-1 and 2005-2. Nearly all the strongest contenders were issued in Mexican pesos and Brazilian reais, steady examples of the dizzying growth of the structured finance business in these markets.
Yet the only serious cross-border candidate turned out to be the best deal. Backed by bridge loans for construction, the winner was sized at $210 million and split into a $60 million unwrapped tranche and a $150 million wrapped tranche. Namesake Metrofinanciera, based in Mexico, was the originator.
The region's top transaction was a bundle of firsts: a debut cross-border issue in its asset class sold into the capital markets; the first time Ambac wrapped a deal backed by Mexican existing assets in either the local or cross-border arena; the first time any monoline insurer wrapped a deal in Mexico's real estate sector; and an inaugural transaction for sole lead Dresdner Kleinwort Wasserstein, which hadn't arranged any structured deals backed by Mexican assets prior to Metrofinanciera.
"By monitoring the activity in the local market, we saw an opportunity to bring international investors to participate in the growth of [the housing sector]" said Carlos Rosso, vice president of corporate finance and origination at DrKW. While new to Mexican securitizations, Dresdner had arranged future flow deals in Eastern Europe and financial transactions for Mexican corporate clients.
Closing June 30, the tranches of Metrofinanciera Trust shared a legal final maturity of nine years and average life of six. The 2005-1 notes were sized at $150 million and priced at 36 basis points over three-month Libor, thanks to the Ambac wrap. Fitch Ratings, Moody's Investors Service, and Standard & Poor's rated the insured tranche triple-A. The 2005-2 notes came to $60 million and priced at 167 basis points over three-month Libor, with ratings of BBB'/'Baa1'/'BBB+' from Fitch, Moody's and S&P, respectively.
Paradoxically, Metrofinanciera's appeal was in part based on the same trend that has turned Mexico's domestic market into a rich feeding ground for foreign bankers, local and cross-border investors, bond insurers and other organisms in the global ecosystem of structured finance. The country's real estate market has become a magnet for the business, as Sofols, the group of nonbank financial institutions that includes Metrofinanciera, hustle for funds to keep up with a housing boom that appears to be on a perennial supply of steroids. Assets among Sofols devoted exclusively to real estate finance hit Ps129.5 billion ($12.2 billion) in June, up 26% from Ps102.7 billion in June 2004.
While cross-border investors have indeed begun to buy peso-denominated paper directly, they have been the kind that adores high voltage paper, hedge funds with a cultivated taste for risk. The investors that snatched up the Metrofinanciera Trust notes were different animals altogether.
"We targeted primarily quality bank-type investors and a number of other institutional investors focused on U.S. ABS and some other structured finance groups," said Surat Maheshwari, head of private placements at Dresdner. "A total of eleven investors participated in the transaction, including bank conduits, insurance companies, and structured finance groups of other institutional investors."
As for pricing, Dresdner had to contend with the initial view among some investor circles that the triple-B-rated subordinated tranches of U.S. real estate deals were a fair comparable. "We argued that there shouldn't be a subordination premium," Maheshwari said. The spread, he added, came out tighter than the subordinated pieces in the U.S. market.
As is the case with first-time deals, the structuring process was a bumpy road for Dresdner. To mitigate currency risk - the collateral, after all, is denominated in pesos - the arranger had to attach a swap to the transaction. While the swap provider, Dresdner Switzerland, was an in-house entity, it still had to be persuaded. The main sticking point was the maturity of the cross-border swap, which ended up covering the full length of the deal, sources said. Liquidity in the peso-dollar swap market thins out beyond three years, and anything beyond five years is a tough sell.
The swap structure could attract copycats. "[It] could be applied to other existing asset structures from Mexico," said Michael Morcom, vice president of emerging markets at Ambac. Perhaps even more importantly, Morcom pointed out that bankers are studying the deal to see how it might apply to cross-border securitization of existing assets in Turkey, an event that some are touting as the next big thing in emerging markets ABS.
The bridge loans backing the transaction have an average maturity of 18 months. Among the deal's enhancements, the Sociedad Hipotecaria Federal provides a 14.2% partial guaranty on the original note balance, and there is a 5% overcollateralization. Legal counsel for the transaction was Thacher Proffitt & Wood.
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