Sticking to structured deals because of a dodgy past as spendthrifts, Mexican sub-nationals are leaning on federal co-participation revenues to back local bonds. "All of the [subnational] deals are structured," said Laura Barrientos, senior analyst at Moody's Investors Service. "The Mexican market isn't ready for municipal or state bonds that aren't."

It's been a little over a year since local regulators gave the green light to states and municipalities to issue public debt. So far, federal revenues have been the backing asset of choice. The federal government distributes funds to the states, which in turn allocate at least 20% to their municipalities.

Industrial powerhouse Monterrey became the latest municipality to issue an ABS on Aug. 20. Brought to market by sole lead Acciones y Valores de Mexico (Accival), the Ps168 million (US $16.8 million) notes due 2007 priced at a floating 90 basis points over 182-day Cetes, the government's benchmark treasuries. The yield came smack in the middle of expectations, which ranged from 80 to 100 basis points over. The benchmark is now trading at roughly 7.68%.

"The deal was oversubscribed and was comparable to triple-A-rated corporate issuers," said Rodrigo Barrera, a senior associate with Accival. Monterrey itself won a Aaa.mx' national-scale rating from Moody's and mxAAA' from Standard & Poor's thanks to the structure. Moody's also assigned the deal a local currency/global scale rating of Baa1'.

In early August, well-regarded bread company Bimbo placed a Ps1.85 billion (US $185.2 million), six-year floater at 97 basis points over 182-day Cetes in early August. That deal carried a triple-A rating on the national scale.

But unlike Bimbo's bond - which was dispersed among a variety of institutional investors - Monterrey's ABS drew a monochromatic crowd. High-net-worth individuals snapped up 90% of the deal, while pension funds went for 10%. "It was too small to attract institutional investors," Barrera said.

Half of Monterrey's federal disbursals funneled through the state of Nuevo Leon will go to a master trust set up for semi-annual coupon payments. The bond will fully amortize at maturity. The structure includes a reserve fund that covers the next coupon payment. The ABS placement comes on top of a loan owed to Banobras. Combined, they will amount to total debt-to-revenue ratio of about 18%. Under the rules of the trust, Monterrey cannot exceed 25%.

Mexico's Fiscal Coordination Law requires that states transfer municipality's participation revenues within five working days of receipt from the federal government.

Hanging on the coattails of Monterrey is the fast-growing municipality of Zapopan, slated to issue a similarly structured deal on Sept. 6. Also handled by Accival, Zapopan's deal is for Ps147 million (US $14.7 million) and enjoys top-notch ratings from S&P and Moody's. A full 100% of rights on federal revenue flows will be transferred to a master trust designed to disburse bond payments. The certificates mature in five years and pay out semi-annually. Instead of a bullet, Zapopan opted to amortize a full 60% of the principal in September 2005, with 10% semi-annual amortizations thereafter. Accival's Barrera expects the Zapopan deal to price near Monterrey.

An electronic and agricultural center, Zapopan sits in the urban sprawl of Guadalajara and receives federal revenue via its home state, Jalisco.

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