Mexico's Metrofinanciera has been attracting a good deal of attention lately. The real estate finance company has entered a non-binding agreement to acquire peer Credito y Casa, a venture that has put Metro's groundbreaking cross-border RMBS on ice, according to a source close to the potential buyer. Meanwhile, another, outstanding transaction from the company - groundbreaking in its own way - has been stumbling.

The acquisition talk started percolating a few weeks ago, right when the company was readying Mexico's first cross-border RMBS via Deutsche Bank. Sized at 295 million inflation indexed units (UDIs) ($102 million), the deal has a legal final of 27 years and is rated BBB+', Baa1', and BBB+', respectively, by Fitch Ratings, Moody's Investors Service, and Standard & Poor's.

"[Metro] didn't want to make noise placing an issue and then coming out in a month or two with the [acquisition] news," the source said.

A Metro official declined to comment, while Deutsche Bank officials didn't return requests for comment as of press time.

The acquisition, which has been reported in at least one media outlet as a done deal, has not actually been closed, the source said. "Shareholders in Metrofinanciera and Credito y Casa have reached a non-binding agreement," the source said. According to another source the price tag will probably be over $180 million.

Metro is smaller than its target, with Ps12.0 billion ($1.1 billion) of assets as of July, against CyC's Ps19.6 billion. But it has played the domestic structured market more aggressively and has grown at a faster clip. Metro was the first Sofol - the local moniker for real estate finance companies - to issue a cross-border deal backed by real estate receivables last year. Its asset base swelled by 149% in the three years to July 6, while CyC's expanded by 63%.

Cracks in the structure

Aside from the acquisition talks and the delayed deal, Metro has a troubled outstanding transaction on its plate, one that's turned out costlier than expected and could end up pre-paid, according to sources. The kicker is this isn't just any deal; it was Metrofinanciera Trust 2005-1 and 2005-2. This was the first cross-border transaction from Mexico backed by real estate receivables, the first time a monoline insurer wrapped a deal backed by Mexican existing assets - Ambac did the honors - and a debut for sole lead Dresdner Kleinwort Wasserstein. It also won ASR's award for Latin American deal of the year in 2005.

The 2005-1 series totaled $150 million and was wrapped; the 2005-2 series amounted to $60 million and was unwrapped. Both tranches have a seven-year final and were issued in June 2005.

The health of the collateral behind the transaction has been diminishing, according to Fitch, which placed its BBB' rating on the unwrapped piece on negative watch. "The return on the collateral has been insufficient to cover the total costs of the transaction," the agency said. "This negative arbitrage has caused deterioration in the level of collateral."

S&P, which has issued a commentary on the transaction but so far hasn't touched its BBB+' rating on the unwrapped tranche, opined that a drop in the overcollateralization level to around 111.14% had been occasioned by a "temporary structural cost burden." The indenture stipulates an OC of 111.20%. On the bright side, S&P pointed out that delinquencies for the underlying bridge loans have remained within the levels typical of that asset class for domestic deals.

The source close to the transaction said that the problem is ultimately one of structure. As such, Metrofinanciera is in talks with investors to improve the vehicle, but has kept open the possibility of pre-paying the deal, the source said. Among the structural features that have been eating into the flows is the currency swap, which mitigates the mismatch risk between the underlying collateral and the dollar payments. Dresdner Switzerland is the swap provider. A Dresdner official couldn't be reached for comment.

Both Fitch and S&P pointed out in their reports that Metrofinanciera has been pro-actively tackling the structural problems.

Meanwhile in Mexico, the pipeline remains healthy, while banks are now looking to follow the lead of Sofols into the RMBS market (see p.38 story).

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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