The Mexican Commodity Funding Corp. (MCFC) was in the market last week with Prudential Securities, selling between $250 million and $300 million in sugar-backed paper through the MCFC Commodity-Backed Note Program 2000.

The Pru has raised over $500 million in U.S. dollar-denominated, commodity-backed notes issued through the program since 1996.

Essentially, Mexican sugar mills sell their finished product to the MCFC, agreeing to re-purchase it on a later date. The MCF then issues notes against the commodity and when it sells the sugar back to the refiners, the proceeds are used to repay holders of the short-term securities.

The agreement is structured as a margin loan to the refiners, who must put up additional tonnage if the price of sugar falls during the funding period.

In contrast with past offerings through the program, the present one features a foreign currency rating of BB+ and a local currency rating of BBB by Duff & Phelps Credit Rating Co. (DCR).

"We decided that the deals are very complicated to do due diligence on," explained a source from the Pru's commodities finance department in New York. "We felt it was probably easier to reach a certain segment of emerging market debt buyers if the deals had a rating rather than requiring the investors to do all the initial due diligence."

The structure provides several layers of protection for investors, at both the government and the collateral levels. The notes have the support of the

Mexican government through a letter of credit issued by one of the country's development banks and through the government's unconditional guarantee of payment thereunder. Together, this covers 40% of the program's debt service.

The remaining amount is secured with warehoused sugar, which the issuer owns through repurchase agreements entered into with various sugar mills. Overcollateralization and a daily valuation of the collateral will provide a buffer against potential declines in sugar prices or volatility in the peso-dollar exchange rate.

Although commodity financing has existed in Latin America for a long time, this is the first program to receive a credit rating.

"This rating is the first of its kind," said Chris Donnelly, head of DCR's Latin American structured finance group. "The sugar industry is important to the Mexican economy, which happens to be the second largest sugar-consuming nation in the world. Innovative structures such as this provide the industry with some much-needed liquidity and several banks have already expressed an interest in structuring similar programs in other countries."

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