The Mexican government termed out its domestic debt last week with the inaugural issue of a 20-year fixed-rate treasury. Despite a timid debut at Ps1 billion (US$90 million), the deal rippled into every corner of the structured market. "It's a huge step," said Rogelio Arguelles, senior director at Fitch Ratings in Mexico. "The main beneficiaries are [originators] who want to borrow for the long term."
By adding a decade to its existing fixed-rate curve, the government set the foundation for a lengthy benchmark. Those that stand to gain are infrastructure projects, sub-national credits and housing finance companies - basically, all the main players of the structured arena.
The debut transaction priced at 8.39% on Oct. 29, 30 basis points outside the 10-year, until then the longest fixed-rate tenor. The bid-to-offer was 3.5X. In a further ego boost to the Mexican government, at the same treasury auction the yield on six-month Cete treasuries tightened to a historical low of 5.37%. None of this was lost on securitization dealmakers.
Subsovereigns next in line?
"This is going to give quite a bit of comfort to people," said Charles Nottebohm, vice president of Dexia Credit, which provided a partial guaranty to the municipality of Tlalnepantla earlier this year in a Ps96 million (US$8.7 million) deal backed by a blend of water fees and property taxes.
In the sub-nationals crowd issuers have gone as far out as 12 years in this post-Tequila crisis era. The state of Guerrero crushed the 10-year barrier in mid-May, with a Ps860 million (US$78 million) dip into a bond program, which closed with a same-dated Ps480 million (US$43 million) issue in late August. Both were backed by federal co-participation revenues. The State of Nuevo Leon also tapped 12-year funds with a Ps978 million (US$88 million) securitization of payroll taxes. While Guerrero and Nuevo Leon proved bold in pushing out maturities, neither was fixed-rate. The state of Chihuahua has taken it the furthest when it comes to fixed-rate paper, issuing a total Ps2.5 billion (US$226 million) late last year in two 10-year deals. Collateral was toll-road revenue.
Deals backed by federal co-participation revenues are especially well positioned to capitalize on a longer fixed-rate treasury yield curve, given that they are bound to central government risk. An actual benchmark, however, will take time to evolve. So far, the Mexican government has not released a timetable of the frequency or volume of issuance for 2004 and there will be no more issues of the maturity for this year, according to government officials. Still, "The idea [for next year] is to generate liquidity" for this tenor, said the Finance Ministry's head of investor relations David Madero, via e-mail.
Setting tone for future MBS
Pushing out government tenors will also be a boon to the housing finance market, which might yet produce the country's first proper MBS before the year is out. "It sets a long-term precedent," said Mark Zaltzman, head of corporate finance at Su Casita, the second largest Sofol, which is shorthand for a specialized group of housing finance providers. Assets at Su Casita hit Ps15.5 billion (US$1.4 billion) at the end of Q3.
Reflecting this sector's galloping rate of expansion, merely through organic growth Su Casita's assets have jumped 14% since 2002 year-end.
Still, the gestation period for a Mexican MBS market has dragged on longer than many observers had foreseen and a sign that investors are warming to longer-term paper is not being taken lightly. "The big question for the mortgages was always, who's willing to securitize at such a long term?'" Zaltzman said. To date, the Sofols have been securitizing bridge loans for construction, largely because they easily allow for transactions with seven-year maturities. Unless the assets have been originated prior to the early '90s, structuring an MBS with that kind of maturity is all but impossible.
Most Sofols have been originating mortgages in inflation-indexed units (UDIs) for 25 to 30 year terms. Until recently, fixed-rate loans have gone as far as 15 years. A month and a half ago, Su Casita originated the first 25-year fixed-rate mortgages since before the Tequila crisis of the mid-90s.
It is the duration, and not the maturity, of a given treasury that establishes it as a benchmark of a given deal, Zaltzman noted. But specifics aside, the fledgling 20-year treasury underscores the solid appetite for long-term risk among Mexican investors, a prerequisite for the looming MBS market that reportedly has the likes of Credit Suisse First Boston, UBS Warburg, Dresdner Kleinwort Wasserstein and BBVA Bancomer jockeying for position.
Toll-roads: hungry for long-term
Toll roads and other infrastructure projects have perhaps the most to cheer about. From their ranks come the longest-dated securitizations. Toll-road bonds issued over the last few years, for instance, have maturities of up to 17 years, most denominated in UDIs. The new treasury "certainly will support the sector as a benchmark," said Fitch's Arguelles.
The asset class has already attracted MBIA, with two transactions under its belt for the local currency equivalent of roughly US$500 million. By injecting confidence into long-term peso borrowing the treasury is likely to stir interest in project deals among other foreign guarantors, sources said.