Following a smooth passing through Mexico's congress, the first part of President Vicente Fox's financial reform has kicked in, and the attempt to facilitate the development of the local long-term debt market is well under way with the recent invention of certificados bursatiles.
The certificados will replace obligaciones, often seen in MBS transactions like Sucasita. However, the role of certificados in structured and securitization transactions are secondary - the long-term debt market is the primary. "What we had seen in the past, and was the case for the last three years, was the use of PMPs or medium-term promissory notes," said an attorney in Mexico. "And there was a significant interest in the market, to issue longer term paper, meaning seven years or something like that."
The promissory notes were deemed as relatively skimpy-type instruments in the sense that they did not allow for covenants, they did not easily permit early termination or events of default and according to sources, the structure to support them was insufficient.
As a result of these problems, issuers began to use obligaciones, what some consider long-term bonds in Mexico. However, obligaciones are relatively burdensome and expensive to issue. "There was a very big contrast. Issuers could go out to the international market and issue bonds without any of these formalities, so the oddity is that they could go about tapping the international market with very simple, straightforward instruments in a very efficient and straightforward manner, but if they wanted to do so in the local market they were burdened with this formal instrument that was very rigid," the attorney said.
The creation of the certificados bursatiles is an attempt to generate instruments for the local long-term debt that can be issued without significant formalities but will contain a covenant structure, solutions for defaults and the like.
The certificados bursatiles are out there now, according to sources. In fact, the lawyer is currently working on some local MBS transactions in Mexico that are attempting to use the certificados bursatiles along with a specially crafted trust to segregate the assets. The deals are expected to come to market this summer.