Already one of the most populous metropolitan centers in the world, Mexico City is sprawling somewhere new. Following the lead of other subnational entities in the country, this monster megalopolis has surveyed the terrain of structured finance and apparently likes what it sees. According to sources, the Federal District (FD) - the city's heart - has handed a mandate to Citibank for a transaction amounting to at least Ps2 billion (US$192 million).

Other state and municipal issuers in Mexico have entered the securitization market brandishing their most tried-and-true asset, federal participation revenues. Recently, the State of Mexico, a jurisdiction distinct from the Federal District, broke away from the pack and backed a deal with payroll taxes. But neither is an option for the FD. "It can't take on debt directly, it's against the law," said one source. So it appears the transaction will be a CLO, backed by a loan that Citibank will lend the FD via the Federal Government and then securitize.

Talk is that Fitch Ratings and Standard & Poor's will rate the structure. Fitch has a stand-alone rating on the Federal District of BBB+(mex)'. But since the central government folds the city's debt into its own, liabilities have an effective AAA(mex)'. While the national government parcels out participation revenues to other subnational entities, the FD is an integral part of the federal budget.

The central government appointed the mayor of the FD until 1997, when a popular vote was instituted. Some see the budget overlap as a holdover from the days of direct political control.

The country's financial hub, the Federal District is home to 8.6 million Mexicans and has a floating population of about 2 million. It forms the core of a conurbation that is 18-million strong.

Guerrero terms it out

Elsewhere in the subnational sector, the state of Guerrero has slated a Ps860-million (US$82.5 million) deal for pricing May 23 (ASR 3/3, p.23) after being stuck with regulators since February. Lead bank Interacciones was initially going to float the entire Ps1.5 billion (US$143.9 million) program, but has decided to break it up instead. Price talk on the deal is 110 basis points over TIEE or Cetes, whichever benchmark is chosen at pricing.

All three ratings agencies have given the deal a double-A plus on the national scale. In many respects, the transaction is a standard subnational securitization of participation revenues disbursed by the central government.

Yet its maturity marks a sharp terming out from previous deals in the sector. Guerrero has a 12-year legal final maturity and 7.5-year average life. Recent peer transactions have gone out only as far as five years.

The securization is also subordinated to existing debt, which might make some investors wary if not for the rating. "It shouldn't be much of a problem, because the structure has sufficient coverage," said Eduardo Hernandez, an analyst at Fitch. His colleagues at the other agencies apparently agree, given that all three placed the transaction only a notch short of triple-A.

Proceeds will go to paying back roughly the same volume in a handful of loans owed to Santander Serfin. The average yield on that debt is an inflation-indexed 7.45%. Debt costs for Guerrero are expected to drop appreciably with the structured deal.

While Guerrero translates to "warrior", the state is known for more hedonistic pursuits. It is home to the busting resort city of Acapulco.

http://www.asreport.com

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