While Mexican domestic RMBS took flight a few years ago, CMBS has been sputtering to get off the ground. But some commercial properties in Mexico have already joined the securitization game, with three U.S. CMBS this year folding in Mexican collateral, according to sources. There is potential for more, as long as U.S. investors are willing to accept Mexican risk, which can, at any rate, be heavily mitigated.
The demand for collateral from south of the border is coming from banks in search of higher yield, as spreads in the U.S. market have shrunk to unappetizing levels. "By the end of the year, we should see at least one more hotel deal" with Mexican exposure, said David Harrison, director in the structured finance group at Fitch Ratings.
Harrison added that the best Mexican candidates for inclusion into U.S. CMBS are in the hospitality industry. "They have operational similarities with [their peers] in the U.S.," he said, adding that an established name that has a strong relationship with the flagship in the U.S. is especially appealing to lenders. The fact that the cash flows of hotels in Mexico are largely dollar-denominated is another factor in their favor.
Indeed, the two CMBS rated by Fitch this year included hotel properties. Credit Suisse First Boston Mortgage Securities Corp. Series 2005-TFL1 was sized at $1 billion and closed April 17, with a 15-year maturity for virtually all the series. Some 7.5% of the collateral consisted of a loan to One & Only Palmilla, a 172-room luxury resort in the Baja Peninsula. The loan has a spread of 337 basis points over Libor and matures Jan. 9, 2007. The shadow ratings on the loan are BBB-' and Baa3' from Fitch and Moody's Investors Service, respectively.
While Fitch views the repatriation of income and related currency risk as a "concern", the loan benefits from political risk insurance co-issued by Great Northern Insurance and National Union Fire Insurance, a fully owned unit of American International Group. Political risk insurance covers, for a set period of time, any delinquency that results from government-imposed capital controls. Column Financial is the originator of all the loans in that deal, which was led by Credit Suisse First Boston and Wachovia Securities, an arranger in the Mexican RMBS market.
The other Fitch-rated CMBS with Mexican collateral this year was COMM 2005-FL10, sized at $1.8 billion and issued March 30, 2005 with a five-year maturity. Two Mexican units of Four Seasons Hotels Inc. form part of a batch of loans that has Strategic Hotel Capital as the sponsor and accounts for 16% of total collateral. The loans have a spread of 179 basis points of Libor and mature Sept. 9, 2006. Fitch gave the portfolio a shadow rating of BBB-'. One of the hotels is located in Mexico City. The other is situated one hour north of Puerto Vallarta, on a private peninsula. The Mexican assets benefit from political risk insurance provided by Zurich Insurance Co., which covers 75% of the loan amounts. Deutsche Bank was the originator.
Apart from political risk insurance, loans backed by Mexican collateral can include other risk-mitigating features, such as liquidity facilities and currency swaps, according to Fitch. Still, these enhancements can't lift Mexican collateral higher than three or four notches above the country ceiling. Fitch rates Mexico BBB-' on the foreign currency scale. At Moody's the rating on Mexican collateral could conceivably hit triple-A if the enhancements are strong enough, according to Paolo Obias, senior vice president at Moody's. The agency rates Mexico Baa1' on a foreign currency basis.
One risk of Mexican collateral in a U.S. CMBS is the lack of a legal precedent in Mexico related to the recovery of defaulted securitized cross-border loans on commercial estate, according to Fitch. In these transactions players typically use a guarantee trust as a way to achieve an out-of-court foreclosure and avoid lengthy and unreliable proceedings in local courts, whose performance can significantly vary from state to state, according to Jose Raz Guzman, a partner at Mijares, Angoitia, Cortes & Fuentes.
A third U.S. CMBS deal, not rated by Fitch, features a loan to office complex Torre Mayor. "It's the first U.S. deal we've rated with a Mexican office [building]," said Moody's Obias. Still in the market, that transaction is sized at nearly $2 billion and is comprised of loans originated by Bank of America and Barclays Capital Real Estate. Extended by Barclays, the Torre Mayor loan backing the deal makes up 2.8% of the collateral and matures in 2015. The transaction matures in 2040.
Touted as the tallest building in Latin America on its Website, Torre Mayor stands at 59 stories. Tenants include Barclays Bank, Corporacion Durango, McKinsey & Co., and Scandinavian airline SAS.
Fitch indicated that CMBS with collateral from Mexican office buildings is not as promising as hotel-backed deals. Office rents have declined by over 40% over the past five years, the report said. The decline, however, seems to be leveling off.
Another type of commercial property, industrial facilities, has also figured in deals, but has been lower profile, Raz Guzman said. "Most of them have been private," he added. Harrison pointed out that with the boom in distribution and manufacturing in Mexico fed by NAFTA, industrial facilities were becoming ripe for U.S. CMBS.
Apart from loans, commercial properties in Mexico have a lack of financing alternatives. While residential mortgage providers have started to tap the local market, the only public CMBS to come out domestically was bought back by originator GICSA earlier this year, when it was only slightly over a year old. "There is local appetite, as long as you have the proper structure and a diversified pool of assets," said Raz Guzman, who added that two domestic CMBS were in the works.
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