Echo of deals done in Chile and Colombia

Mexico's domestic market has moved into cross-currency CDOs, a product that has already taken root in Chile and Colombia among bankers keen to cash in on sharp discrepancies between local and foreign yields on Latin American corporate and sovereign bonds. In a first-ever deal, Credit Suisse First Boston and Inversora Bursatil have registered with Mexican regulators a peso-denominated bond for up to Ps3 billion (US$272 million), backed by dollar sovereign bonds carrying a 10.375% coupon and due Feb. 17, 2009. If and when it is issued, the peso bond would mirror the underlying paper in the timing of coupon payments and final maturity. CSFB structured the transaction and Creel, Garcia-Cuellar & Muggenburg acted as legal counsel.

CSFB fashioned the deal months ago, but was waiting for propitious market conditions to launch, according to sources close to the transaction. Officials could not be reached at either of the leads.

In order to mitigate currency risk, the transaction includes 10 swap contracts between the trustee and a unit of CSFB, matching the number of coupon payments. Under the terms of the deal, the counterparty agrees to swap the underlying bond's dollar payments into pesos for the trustee.

Despite this risk mitigation, the deal doesn't carry the triple-A that a sovereign bond would rate on the national scale. Moody's Investors Service and Fitch Ratings have assessed the deal at Aa2.mx' and AA+(mex)', respectively. "Even with the ten contracts, we see some exchange-rate risk," said Rogelio Arguelles, senior director at Fitch Mexico. "If the peso were to suddenly appreciate, for example; we couldn't disregard that."

Moody's and Fitch rate CSFB on the global scale Aa3' and AA-', respectively.

Interest-rate arbitrage could be a driver behind this transaction, as it has spurred similar deals in Colombia and Chile. Rates have been steadily sliding in Mexico over the last few years, fueled by improved credit standing for the sovereign and growing liquidity among institutional investors.

On the other hand, the yield on foreign bonds has tightened as well over the last few years, which may explain why the leads have apparently been waiting for the right moment. According to one trader, the 2009 bond targeted for this deal has outperformed the overall Mexico curve over the last three weeks. He did not, however, notice any unusual moves that might indicate that investors were anticipating that a significant chunk of the paper would be taken off the market.

There may be another motive for the transaction as well. The CSFB unit providing the swap might have been looking for the counterparty to a dollar-peso operation. That was one of the drivers of a series of deals done in Colombia's domestic market last year, according to sources. The collateral for that transaction was paper issued by CSFB USA in the North American market between 1995 and 2001. Other cross-currency CDOs have hit the Colombian market over the last few years. In some, the underlying paper is rated junk abroad.

In Chile, Securitizadora Bice has used dollar bonds from the sovereign and from major utilities for local issuance. That strategy fed off the growing rift between dwindling domestic yields and foreign yields pressured up by the Argentine crisis. Subsequent downgrades for the utilities backing some of the bonds, however, highlighted the risks of tapping a single asset.

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