Since 1996, Mexican banks Banco Nacional de Mexico S.A. (Banamex) and Bancomer S.A have placed credit card securitizations worth over $1 billion in the international markets.

"The securitization of credit card vouchers has proved very valuable for us as a way to access long-term capital with an investment-grade cost," said Luis Hernandez, vice-president of structured finance at Banamex. "It has been especially effective because we were able to pierce Mexico's below-investment grade sovereign ceiling."

According to a recent report from Standard & Poor's Ratings Services it is all thanks to a strong structure, booming tourism, the increased usage of credit cards and economic integration.

A Risk Mitigating Structure

The transactions stand on several strong pillars. The underlying assets are credit card merchant vouchers generated when a foreign-issued Visa or MasterCard credit or debit card is used in Mexico to pay for goods and services or to withdraw cash from an automatic teller machine (ATM). So, in addition to strong overcollateralization and the issuing bank's solid reputations, the U.S. dollar payments originate from offshore entities A-plus-rated Visa International Service Assn. or A-rated MasterCard International and are deposited into an offshore trust to mitigate sovereign risk concerns.

Receivables are generated from the U.S.-Mexico border to the interior of the country and to the resort areas of the Pacific and Caribbean coasts. "This wide geographic dispersion is another important factor in the securitizations," said Hernandez "Because it mitigates the potential impact of natural disaster in one region on the total receivables volume."

In addition, the receivable pools are diversified by the type of transaction and merchant, which also serves to mitigate concentration risk.

Equally important, the transactions feature financial guarantees from triple-A rated MBIA-Ambac International. Given the difficulties faced by Latin American transactions that are rated at the lower-end of the investment-grade spectrum, securing a financial guarantee is key in these deals' success.

"Investors have many concerns when it comes to risks involved in emerging markets paper," explained Carlos Costa from S&P. "With the triple-A rating, the issuing banks were able to access a much deeper pool of investors and to do so in a fast and efficient way."

Volume And Resilience

Undoubtedly, voucher volume is an essential element for the securitization of Mexican credit card vouchers. "Credit card usage by foreign tourist and business travelers has increased dramatically over the past decade," said Costa, citing figures that show that visitor's credit card spending as a proportion of their total spending rose from 10.2% in 1987 to 30.3% in 1997.

"To encourage local merchants to sell their credit card vouchers to Banamex we offer them superior technology and services that include giving companies lines of credit based on the amount of credit card vouchers they process through us," explained Hernandez. "To increase cash withdrawals by tourists, we established a wide presence of our ATM machines, which offer bilingual services. As a result, the bank manages to generate enough voucher volume to

securitize."

The peso crisis of 1994 and 1995 was an important test for the merchant voucher securitizations. Many expected that the dollar volume would be adversely affected by the devaluation. Yet the lower prices in dollars for goods and services, combined with political stability and strong U.S. economic growth, lead to an increase in visitors to Mexico from 1995 onward (the Mexican Ministry of Tourism estimates that in 1997 the U.S. accounted for approximately 88.2% of foreign visitors to Mexico). According to S&P, however, if the penetration rate of credit cards should fail to grow or even decline in any similar future crisis, the total volume of dollar-denominated receivables could decrease.

Overall, the rating agency is largely optimistic about the future prospects for this type of transactions. According to the S&P report, the transactions' strong pool of receivables, healthy cash flows and strong economic principles leave them well equipped to fight adverse conditions in the future.

"There is still some education work to be done," explained Hernandez. "But we have a large pool of investors who are familiar with these transactions and see them as a benchmark because of their performance throughout the years."

The likelihood of credit card voucher deals spreading to other Latin countries seems limited, however. According to sources, the only other country in the region that boasts a high enough volume of tourist activity is Brazil, where central bank regulations make such deals difficult.

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