A presidential vote in Mexico with a hair-thin margin between the two leading candidates could degenerate into a 2000 Florida-style showdown. That's a development that no one in the capital markets wants, not least because the hair-thin advantage as of press time belonged to Felipe Calderon, the center-right candidate of the ruling PAN party.
Yet despite the political limbo this would spell for Mexico, a calm wait-and-see attitude appeared to prevail last week among players in the securitization market.
"It's a question of timing," said Tonatiuh Rodriguez, CFO of pension fund Afore XXI. "This is a natural and normal process; we have the institutions to resolve the process." He said that issuance of transactions would likely stall until there's a clearer idea of where the benchmark interest rates and government bonds will settle for the longer term.
Calderon's leftist challenger, Andres Lopez Obrador, said he would challenge the results in court, citing "irregularities," according to Spanish news service EFE.
Volatility was the name of the game last week in Mexico's financial markets and originators wisely stayed away. Asset prices plunged earlier in the week only to rally sharply July 6, when, with 99.63% of the votes tallied, Calderon had captured 35.85% against Obrador's 35.35%, a half a percentage point lead.
Financial market players in general are more comfortable with Calderon because he has vowed to keep the current administration's economic policies, which have reigned in inflation, brought down interest rates and made Mexico a hot destination for foreign investments. A former mayor of Mexico City, Obrador's rhetoric has centered on boosting social spending and alleviating poverty.
A challenge in the courts could drag on until Sept. 6, the deadline for the Federal Electoral Tribunal to name a definitive winner, according to news reports.
The question is: will originators sit tight for two months? As long as the political tension doesn't boil over, some might venture out. "We knew the market would be nearly shut down for long-term deals for about a month," said Mark Zaltzman, deputy head of corporate finance at Su Casita, one of Mexico's leading housing finance companies and a recurring visitor to the securitization market. Most of the lock out took place before the election. Now that it looks like the uncertainty could stretch further, Zaltzman said Su Casita will see where rates are in a few weeks and decide whether to issue or wait longer. He noted however, that the company's RMBS in the pipeline is denominated in inflation-indexed units (UDIs), which are less sensitive to fluctuating interest rates than straight pesos denominations.
Even if Lopez Obrador were successful in overturning the results and grabbing victory, players said the strong issuance forecast for Mexico wouldn't materially change, though originators might have to settle for interest rates that are higher than they have been in the recent past. One market source said that major benchmarks could jump by 200 basis points and stay there, at least until Lopez Obrador formed his cabinet.
Before the window closed
The last issues to squeeze into Mexico's domestic market were a pair of CDOs backed by Mexican sovereign bonds and a toll road-backed transaction.
Led by Banorte, the two CDOs were designed to take advantage of rate differentials between Mexico's overseas and local bonds. One CDO, sized at Ps1.1 billion ($99.7 million), collateralized cross-border United Mexican States bonds due 2014. With the same maturity as the underlying debt, the peso CDO priced at 53 basis points over 28-day Cetes. Moody's de Mexico and Fitch Ratings rated the transaction Aaa.mx' and AA+(mex)' on their respective national scales. The other CDO, sized at Ps3.8 billion, is backed in equal parts by cross-border UMS bonds due 2009 and 2010. The final maturity is 2010, and pricing came to 38 basis points over 28-day Cetes.
For both deals, Banco Mercantil del Norte, belonging to the same financial group as the arranger, provided the collateral. Banorte provided a hedge to cover the currency mismatch between the collateral and the CDO.
Elsewhere, Arka arranged a transaction backed by toll receipts from a road that provides access to a hotel strip in Acapulco known as the "Diamond Tip". Originated by Grupo Mexicano de Desarrollo, that deal was sized at 59 million inflation-indexed units (UDIs) ($19.5 million) with a 15-year legal final. Pricing came to a real rate of 7% and the rating is mxAA' from Standard & Poor's.
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