Following a spring that was on life support, Mexico's structured finance market sprang to life in late June and into July. A clutch of significant deals closed and more entered the pipeline.
But it was unclear: is the country's ABS market on a firm rebound or is this just another summer fling?
The tone right now is guarded optimism. No is expecting a return to the levels of a couple of years ago, when mortgage originators were a major engine of growth. But sources said the deals that have recently come out and ones in the pipeline point to more varied asset classes and issuers for what remains of 2009 and early 2010.
"We feel the market's already touched bottom," said Victor Gonzalez, director of corporate finance and investment banking at local brokerage IXE. "We've recommended to our corporate clients that they look into structured deals."
One example of this is Credito Real, a consumer finance lender that has been relying on partial guarantees from development bank Nacional Financiera (Nafin) to hoist the ratings on its paper past the single A category. The last Nafin-enhanced issue, which closed June 9, earned a rating of 'mxAA-' from Standard & Poor's. That deal, for Ps500 million ($38 million), had a maturity of 18 months. The guarantees have helped Credito Real keep its liability profile from shrinking too much. With some 81% of its liabilities concentrated in commercial paper, the company no doubt welcomes opportunities to stretch out its curve.
Cemex is another recent visitor to the structured arena, and one that hints at further deals by issuers once able to effortlessly tap the vanilla markets. Two of the cement maker's units, Cemex Mexico and Cemex Concretos, closed a trade receivables ABS on July 16.
With Finacity as structurer and master servicer, and IXE as bookrunner, the Cemex deal was worth Ps2.2 billion and had a 2.5-year legal final. Pricing came to 250 basis points over 28-day TIIE. HR Ratings and Standard & Poor's rated the transaction triple-A on their respective national scales.
ABS is not new to the company. It had a standing conduit deal with WestLB backed by receivables since about 2001, according to a source familiar with the matter. Amounting to between $150 million and $180 million, the conduit was initially in dollars but at some point switched into pesos.
But tapping public investors with an ABS is a different story.
Once an investment grade favorite of emerging market investors, Cemex has seen its credit profile crumple since mid 2007, when the company completed the acquisition of Rinker, an Australian cement producer with the bulk of operations in the U.S. At the time, some analysts applauded the purchase as a win-win. But when construction turned south in developed markets, the reverse appeared to be true.
Ratings reflected this. Cemex went from being a world-class investment-grade company to single-B. On Fitch Ratings' scale it edged down three times since mid 2007, from 'BBB-' to 'B' currently, with a Rating Watch Negative. Before withdrawing its rating on Rinker last March, Moody's Investors Service had similarly downgraded the Australian company in stages to 'B2.' The grade on Rinker was a proxy for a Cemex rating, which Moody's withdrew in late 2006.
"Rinker was heavy in the bubble markets in the U.S.," said an analyst familiar with Cemex. He added that Cemex hoped that the sizable load of debt taken on to acquire Rinker could be shaved down by asset sales. But as the crisis gathered force, prospective buyers evaporated. "That left the company with leverage that was too high and increasing because of falling revenue," the analyst added. "It went from being a leverage issue to a liquidity issue."
Early in July, the company proposed a plan to refinance $14.5 billion in bank debt through 2014, according to Bloomberg News. The last word was that 90% of its bank creditors had agreed in principle to the terms of a proposed debt restructuring, according a report by Barclays Capital.
This crisis narrative is echoed at other companies in Mexico, with varying degrees of intensity.
"Large companies that once were borrowing on a plain vanilla basis are now looking into monetizing some of their assets," said Maria Tapia, an analyst at S&P in Mexico.
Trade receivables in particular are an attractive path to funding in the present environment. "Trade receivables deals have widened out less than corporate deals," said Finacity CEO Adrian Katz, adding that they "expand the ability to tap a different audience of investors and diversify sources of funding."
Before the crisis, a trade receivables ABS rated triple-A on the national scale would have priced at around 125 basis points over 28-day TIIE, according to Katz. He said Finacity was working on further trade-receivables deals in Mexico.
Other asset classes are showing promise in Mexico as well.
ABS backed by loan payments that are automatically deducted from paychecks, for instance, is moving beyond the public sector.
Privately-owned Consupago, for instance, has a transaction in the works via Deutsche Bank. Other companies have similar deals in the works, sources said.
Consupago is looking to tap the market for Ps1 billion for a final legal term of five years.
The company lends money to employees of about 320 government offices and related organizations, such as police stations. The largest group in the company's client roster consists of employees of federal government entities. Consupago's borrowers are spread throughout the country.
So far, ABS backed by automatically deducted payments has been the exclusive province of consumer debt lender Fonacot, mortgage originator Infonavit, and more recently, mortgage lender Fovissste. All three are state-owned.
But while Consupago is not a government institution, its customers work for government entities. "It's basically government risk," said Alejandro Pequeno, associate director of Fitch in Monterrey.
Starting up six years ago, Consupago has grown its loan portfolio to about Ps2.34 billion. While growth has slowed down markedly from doubling annually in the company's earlier years, it still remains brisk. The company presently has about 150,000 borrowers, with an average loan of Ps20,000 and 38 months of life. The overall delinquency rate is 1.2%.
The pool backing the transaction now has a remaining life of 36 months. The average weighted yield is a monthly 3.5%.
The deal's pricing may be delayed since only two weeks ago S&P put the corporate's paper on Credit Watch Developing when Consupago announced a possible merger with affiliate Banco Facil, a market source said.
But whether Consupago comes out sooner or later, investors are well aware of the appeal of automatically-deducted payments for deals with some kind of government connection. "We're going to see more of this kind of ABS," said IXE's Gonzalez.
While the landscape is ripe for new assets, the market for deals backed by mortgages and other real estate collateral remains constricted. There is still room for government entities, such as the aforementioned Fovissste and Infonavit, and bank lenders, including BBVA Bancomer, which has a RMBS - its fifth - for up to Ps6 billion in the pipeline. But nonbank entities such as Sofols are still struggling to return to a market that once embraced them.
"Market issuance across various asset classes is recovering, with the exception of mortgage Sofoles," said S&P's Tapia. "We'll see more securitizations of auto loans, consumer assets and trade receivables."