A deal last week by Mexican credit agency Fonacot ended a dry spell in consumer loan securitizations that began with the final issue off a program by department store Elektra in mid 2002. "After Elektra we saw nothing," said Maria Tapia, an analyst with Standard & Poor's. While bankers have lavished attention on other asset classes in the peso market, consumer loans have been kept on the back burner. But as low interest rates hold for consumers and originators look to expand, more deals are expected in the future.

In a recent report on the sector, Standard & Poor's said the annual growth of non-bank consumer loans was 10.1% for the past five years, based on central bank data. Growth galloped ahead at 16% in the first half of the year. "The biggest department store chains have drawn more borrowers than ever and a result has been increasing their sales and loan portfolios," the report said. Sources cited stores Sears, El Puerto de Liverpool, El Palacio de Hierro, Singer, and Samsa as leading originators and potential issuers.

For the time being, Elektra is out of the game. The eponymous group, which controls the department store, created Banco Azteca in late 2002 and mandated the bank to provide consumer credit, largely through Elektra. "Now that they've got their own bank, there isn't any need for securitization," said one Mexico City-based banker.

The issuer is taking it one step further and actually buying back its outstanding securitized bonds, according to sources. That does not mean, however, that the group will not return to the market, particularly if Banco Azteca continues to grow consumer loans at the healthy clip of the last few quarters. "We might see them issue in the future," said Luis Enrique de la Pena, an analyst with Fitch Ratings. According to the bank, its active credit portfolio hit Ps2.4 billion (US$215 million) at the end of June, up 7% from comparable figures for the group a year earlier.

While a major player has dropped out, other hurdles might be deterring its peers, sources said. The taxes on selling consumer portfolios to a trust might have kept some originators away. Others might be turned off by the heavy disclosure of operational information required to do a placement.

Still, the hunger for funding is bound to nudge at least a few into the market sooner or later. S&P, for one, sees strong potential in the sector.

State-owned Fonacot, at least, is expected to return to the market in the not-too distant future after floating a Ps500 million (US$45 million) deal backed by a single, non-revolving pool of consumer loans. The transaction priced at 6.99% on Sept. 30 and had a maturity of one day over a year. The agency is expected to push the maturity in future deals, reflecting the overall trend in the market of longer-term consumer credit. Fitch and S&P rated the Fonacot deal AAA(mex) and mxAAA, respectively.

Meanwhile, a few deals have priced in the Mexican market in the last couple of weeks. On Sept. 30, the state of Veracruz placed a bond backed by payroll taxes, the second issuer after the state of Mexico to do so. Sized at Ps450 million (US$40 million) the 14-month transaction priced 300 basis points over the 28-day benchmark TIIE interest rate. Fitch and Moody's Investors Service rated the transaction AA(mex) and Aa2.mx on the national scale, respectively. A couple of features differentiates this transaction from the program launched by the state of Mexico late last year, according to Luis Videgaray, managing director of Protego Asesores, which structured both deals. "The underlying rating for Veracruz is much stronger than for Mexico...but the payment source is stronger in the Mexican case," he said. While banks collect the overwhelming bulk of payroll taxes in the state of Mexico, they control only half the flows in Veracruz. Less reliable government offices are in charge of the rest. Grupo Bursatil Mexicano was the placement agent and Thacher Proffitt & Wood was legal counsel.

The short, 14-month maturity jibes with the political rhythms of the state. Elections are slated for mid-2004, with the new administration assuming power at the end of the year. The deal is termed to mature before the changeover.

Elsewhere in Mexico's securitization market, Deutsche Bank led a deal for housing finance company Hipotecaria Nacional. Backed by bridge loans for construction, the Ps420 (US$38 million) senior tranche of the deal priced at 130 basis points over 3-month Cetes. The entire transaction was sized at Ps500 million (US$45 million), with junior tranches providing enhancement for the senior piece. Amounting to Ps60 million (US$5.3 million) the mezzanine tranche yielded 360 basis points over 3-month Cetes. S&P and Fitch rated the senior piece triple-A on the national scale, and the mezzanine tranche, single-A. Pricing was tight compared to previous housing deals backed by construction loans. Spreads for this maturing asset class have shrunk as investors grow comfortable with securitizations and demand lower and lower premiums over identically rated plain vanilla paper. "Now that these deals have been in the market for a couple of years investors see that, at the end of the day, the risks are comparable [to non-structured deals]," said a source familiar with the deal. Mijares, Angoitia, Cortes & Fuentes was legal counsel.

Finally, Pacsa priced a toll road transaction on Sept. 25. Sized at the equivalent of US$325 million, the senior tranche was wrapped by MBIA and priced at an inflation-indexed 4.5%. The transaction is MBIA's second in the domestic Mexican market. BBVA Bancomer was the arranger.


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