The stage is set in Mexico for a deal that might prove to be the curtain raiser for a lively MBS market in 2004. Sole lead Credit Suisse First Boston was roadshowing the transaction last week and pricing is anticipated for the first week of December, according to sources. Sized at 177.9 million inflation-indexed units (UDIs) (US$53 million), the deal has been rated Aaa.mx' and mxAAA' by Moody's Investors Service and Standard & Poor's, respectively. Its final legal maturity is 16 years - the kind of length you'll only find in the toll-road sector in Mexico.
Su Casita, one of the country's housing finance companies known as Sofols, and GMAC Hipotecaria are the originators. Local firm Mijares, Angoitia, Cortes y Fuentes is legal counsel.
"It's a very novel transaction," said Juan Pablo de Mollein, associate director of Latin American structured finance at S&P. Indeed, it promises to be the first proper Mexican MBS.
Rivals are watching CSFB closely, as the bank has never led a securitization in Mexico's domestic market, sources said. "It was a surprise for many that they're apparently doing this on their own," said a Mexico City-based player away from the deal. "Their capacity of distribution is questionable; but who knows, they may syndicate out the distribution."
The prospectus on the Web site of the Mexican Securities Exchange had CSFB as the only arranger. Bank officials could not be reached for comment.
One domestic competitor did not see distribution as a critical issue for a deal with a maturity that is this long, considering the likely pool of investors is fairly tightly knit. "Normally, you'd place this with pension funds - of which five have 80% of the market - and the 15 major investment funds," he said. Add insurance companies, and at the very most, the potential crowd of buyers would number about 45, he said.
Leading players in the local housing arena include Deutsche Bank and IXE Casa de Bolsa. BBVA Bancomer, UBS and an entirely new entrant, Dresdner Kleinwort Wasserstein, are understood to be busy working on mandated MBS. While recently focused on the sub-sovereign class, Citigroup's Banamex Casa de Bolsa is also cozying up to mortgage originators, sources said.
Talk is that the CSFB deal was originally cross-border and that's what gave the foreign upstart the edge in winning the mandate. On the other hand, no one has heard complaints from GMAC or Su Casita about the eventual switchover to local currency or the overall execution so far. Officials from Su Casita have recently indicated that historically low interest rates domestically have jacked up the relative cost of issuing in dollars. No one is ruling out future issuance in greenbacks, however.
Undoubtedly helping offset the lead's rookie status is the inoffensive size of the transaction and the fact that Su Casita is already known among investors for its straight vanilla- and bridge loan-backed paper. What's more, the prospect of taking on risk from GMAC Hipotecaria has some on the buyside licking their chops, sources said. And there is always the appeal of a first-ever structure.
Joining CSFB in the deal as a guarantor is fellow European FMO. This marks the Dutch development bank's second incursion into the housing sector, following a liquidity facility for a construction loan transaction by Credito y Casa (see ASR 4/7, p.1). In the Su Casita/GMAC deal, the liquidity facility covers up to 9% of the transaction and is also denominated in UDIs. The bank chose a facility over a pure partial credit guaranty because "it simplifies matters for us when [it] is drawn," said FMO Investment Officer Remco Polman via email.
In the Mexican system, there is one salient difference between the two modes of enhancing. With a guaranty, individual bondholders have a direct claim on the guarantor; with a liquidity facility, the trustee draws on the facility, acting, of course, on behalf of the investors. However, the two mechanisms are viewed the same from a credit perspective, sources said.
The strength of the originators was a major draw for the Dutch bank. "Su Casita and GMAC have a very good track record in managing their assets," Polman said. "We believe that this is the moment for a transaction of this nature."
This view reflects the zeitgeist. It took many grueling years to get here, however. In the early 90s, a lack of standardization in mortgage origination and poor servicing alternatives, among other stumbling blocks, precluded the onset of MBS. After the Tequila crisis of the mid-90s, mortgage criteria among originators began to converge, including what was to become the preferred denomination: UDIs. Sofols also evolved into major originators and into the kind of competent servicers a nascent market would need. But even then the path was far from clear. Legal complexities in transferring mortgages to a trust and the variability of the state civil codes that governed mortgages made the task not merely onerous, but prohibitively expensive as well. "Imagine trying to transfer the rights of 2,000 [individual mortgages]. It would have been simply a nightmare," said a Mexico City-based source. But that, sources said, is no longer the case. The pertinent laws have been changed and the costs have subsequently fallen. "Now there are not any obstacles," the source said.
Over the past two years, Sofols had turned their backs on this impossible asset and focused instead on bridge loans, which were much more amenable to securitization. Apart from fewer hassles in the actual structure, a key advantage of this asset was its shorter life. Had the regulatory barriers to MBS dissolved earlier, investors would still have scoffed at the kind of maturities that mortgage securitization typically implies.
GMAC and Su Casita have maneuvered around this by using the excess spread to cap the legal final maturity at 16 years. The average life would roughly turn out to be 10.5 years with the current portfolio, a source said. A smidge over half of the underlying mortgages, originated mostly in 2001-2002, are 30-year loans, while slightly over 40% have a maturity of 20 years, according to De Mollein. The loan yields range from 8% to 22%
On top of the FMO facility, the triple-A tranche has a 3% enhancement from a subordinated tranche.
Su Casita is providing the bulk of the collateral, 71%, with the rest coming from GMAC. The main difference, according to a Moody's report, lies in the size of the loans each originates. The average Su Casita loan in the pool is 76,000 UDIs, while the average GMAC mortage is 240,000 UDIs. That no doubt reflects the socio-economic status of each of the originator's main audience. Su Casita's loans are largely to low-income individuals, while GMAC's mortgages are concentrated in the middle economic strata. For the entire pool, the weighted average original LTV is 78.67%, Moody's said.
There is no backup servicer in the transaction. In addition, "unlike in most U.S. deals, the trustee does not have backup servicing responsibilities with respect to the mortgage loans," Moody's said in a report. Still, sources close to the transaction said that trustee JP Morgan might select a backup servicer later on, even if the servicing is going smoothly. Su Casita is the servicer for both its and GMAC's portfolio in the transaction. Moody's points out that there is a incentive for another Sofol to step up to the servicing plate should Su Casita be dropped. At 1.5%, the servicer fee is attractive and trumps the industry aveage, the agency said.
Another interesting aspect of this transaction - one that is sure to crop up in future MBS - is the UDI swap provided by state housing agency Sociedad Hipotecaria Federal (SHF) for each individual mortgage. In Mexico, individual borrowers take out mortgages that are linked to an index tied to the minimum wage. However, with each payment, a borrower pays a fee that goes to bankroll a swap into UDIs by the SHF. The securitized mortgages, therefore, are in UDIs.
While the mortgages are dispersed throughout the country, the Federal District - basically Mexico City - accounts for 31%. The second largest contributor to the pool is the surrounding State of Mexico, with 18%.
Local bank Banorte closed a transaction in late September that resembled an MBS, but was actually a securitization of cash flows as opposed to the actual assets, sources have said. The heavy seasoning of the pool and other features also diminished the transaction's relevance for future MBS.