With two construction finance-backed deals set to launch in the near future -making a total of three such deals issued in the past year - Mexico may be carving out a niche in housing-finance ABS.
For the second time this year, following a similar deal in April, Mexican builder Geo S.A. de C.V. is in the market with a second issue for the securitization of future account receivables generated by building contracts for low-income housing, to the tune of P169 million (U.S. $18 million). At the same time, Consorcio Hogar is also expected to close on the same type of securitization in the amount of P300 million (U.S. $32 million), which will be the first of its kind for the smaller Mexican construction company.
The underlying assets for both transactions are building contracts for low-income housing by Fondo Nacional para la Vivienda de los Trabajodores (INFONAVIT) and Fondo de Operacion y Financiamiento Bancario a la Vivienda (FOVI). FOVI and INFONAVIT are state-sponsored organizations that provide housing for the low-income sectors of Mexico.
While FOVI and INFONAVIT are similar entities, INFONAVIT is a much larger operation. According to Eugenio Lopez, structured finance director in Mexico for Fitch, FOVI finances about 60,000 houses a year and INFONOVIT will finance about 180,000 this year.
The resources for INFONAVIT include Mexican employers, workers and the government. Under the Mexican federal law, employers are required to deposit a certain percentage of their employees salaries into INFONAVIT accounts, which the employees can later access in order to buy real estate. Therefore, employees that wish to buy a home can use the INFONAVIT savings rather than making monthly mortgage payments. Furthermore, they are not required to make a down payment.
Unlike INFONAVIT, FOVI's only resource is the Mexican government. However, this year FOVI also used U.S. $500 million from the World Bank as an additional resource.
According to sources, Geo is the largest construction company in Mexico, selling nearly 20,000 houses a year. Geo was the pioneer in Mexico for the securitization of construction receivables. The success of the first transaction in April empowered the launch of the second transaction, which is expected to close early this month. Like the first deal, this transaction will have Nacional Financiera, S.N.C. (Nafin) acting as the trustee.
With the issuance proceeds the trust will acquire a pool of account receivables from Geo. Once the construction is completed the housing agencies will pay the account receivables that will be used to pay debt service.
While both Geo deals are similar in many respects, there are some slight differences in terms of the interest rate and conditions. The first transaction had a maturity of about two years and the new transaction will have a maturity of approximately four years. The second issuance is also for a slightly higher amount. The first deal was for P133 million (U.S. $14 million), while the second one is for P169 million (U.S. $18 million).
Prior to these transactions, in order to finance construction projects, Geo normally obtained bridge loans from financial institutions. Now for the second time, Geo has taken an alternative route to financing the construction projects and according to Jose Ramn Tora of Standard & Poor's Ratings Services, "Geo wants to establish this type of long-term issue as an alternative source of financing."
Geo's transaction has been given a preliminary rating of mxAA- from S&P, which is the same rating the first issue received. "From S&P's perspective the fact that one of the main risks in these deals is construction risk (the developer has to finish the houses for the payment from the housing agencies to happen), makes it hard to separate the rating of the transaction from the rating of the developer," Tora said. "In the case of Geo, its predominant market position in the low-income housing market in Mexico allow for that rating elevation."
Fitch has also prerated the deal AA, which is slightly lower than the AA+ rating the first transaction received from Fitch.
"There is a difference because we have a transition in our political environment and INFONAVIT delayed the payments. The first one is stronger than the second one and the environment right now is different," Lopez said.
While Hogar is also one of the largest construction companies in Mexico, it is substantially smaller than Geo, expecting to sell about 5,000 houses this year. This year, Hogar will issue the bond to investors, and the money from the investors will be placed into a trust.
Hogar will take 65% out of the trust to fund the construction. When the construction is complete, INFONAVIT and FOVI will purchase the building from Hogar. As individuals begin payments on their new homes, the money will go into the trust and be redistributed to the investors.
For Hogar, "This will be the first deal of its kind, where the money received from INFONAVIT, once the construction is done and the buyer is found, will flow directly from the trust on behalf of the investors. The intention of this transaction is to get a higher rating by isolating the assets and the cash flow from the originator's bankruptcy risk," said Brigitte Posch, an analyst at Moody's.
Azteca Sofol will supervise the transaction and IXE, a Mexican investment bank, is the lead manager in the deal. Although Hogar's deal is very similar to the Geo transaction, the size and the structure of the deals are quite different.
In the Hogar transaction, the asset and liability will be on the balance sheet, but Geo will not. Having the asset and liability on the balance sheet transfers the risk to the market. "It's a different way to take resources from the market to finance the working capital," Lopez said.
The transaction is still in the rating process for both Moody's and Fitch.
What Does This Mean For Mexico?
There are three main developers in Mexico including Geo, Hogar and Urbi. Urbi has not yet come to market with this type of transaction, although sources say it might be in consideration. However, a clear difference between Urbi and the other companies is that Urbi is still a private company.
According to sources, construction finance receivables could potentially become a well established asset class in Mexico, which would assist the current housing shortage in the country.
This type of securitization is a new concept for all of Latin America. "There are really no other transactions with this type of structure in the rest of Latin America," Tora said. That said, and given that housing shortages are a common problem throughout Latin American perhaps Mexico has provided the rest of Latin America with some fuel for thought.