NEW YORK - Moody's Investors Service played host to one of Latin America's burgeoning stars, Mexico's real estate market, at its sixth annual Latin American Securitization Briefing,' held here Sept. 23. Discussions of deals backed by construction bridge loans and mortgages filled the stately Union League Club drawing rooms as originators explained to current and would-be suitors why foreign money is what they're after.
"The domestic market is not big enough for government and corporate requirements," said Armando Guzman, CEO of Mexican housing finance provider Metrofinanciera. Bonds from private entities average roughly 24% of the portfolios held by Mexican pension funds, mutual funds, and insurance companies. The overall and relative growth of investments in non-government securities isn't expected to be fast enough to meet the voracious funding demand among Sofols, as private housing finance companies in Mexico are known. What's more, the Sociedad Hipotecaria Federal, a state entity that historically bankrolled the sector, has a 2009 deadline to phase out direct funding. "This is why we have approached the cross-border market," Guzman said.
Mexico is running a housing deficit of nearly five million units and originators are furiously cranking out mortgages merely to keep up. Mortgage origination by Sofols is projected to hit $31.8 billion in 2010, versus $11.5 billion this year, according to Guzman. Mortgage and construction-loan portfolios are forecast to grow 25% and 15%, respectively, for the next three years, said Mark Zaltzman, deputy head of corporate finance at Su Casita, another Sofol. Excluding state agencies Sociedad Hipotecaria and Infonavit, the housing finance industry in Mexico has outside financing needs of $5 billion a year, with mortgages accounting for 80% of the total, Guzman added.
For Metrofinanciera and Su Casita, this equation holds one answer: the foreign investor. In the cross-border market, Metrofinanciera and Su Casita each have closed a deal backed by construction bridge loans. Ambac wrapped a single tranche in both. "We were able to take on the credit risk, with the currency risk stripped out by a swap," said Diana Adams, managing director of the emerging markets group at Ambac. "We like the short-term nature of these assets."
Adams also pointed out that the cross-border future flow opportunities that have been the bread and butter of emerging market investors die out when a sovereign is well into the investment-grade universe, as is Mexico.
More cross-border deals from the Mexican real estate sector are on the way, though the volumes will likely remain paltry up against the Sofols' funding appetite. Metrofinanciera, for instance, expects to issue only up to $150 million in cross-border deals next year. The collateral for the cross-border deals have consisted entirely of bridge loans so far and mortgages have proven more problematic.
And mortgages are precisely where the Sofols are hungriest. "The obstacle is the [currency] swap," said Su Casita's Zaltzman. "We'd have to use a fixed amortization schedule for the swaps [and] we haven't found a partner in mitigating prepayment risk." The hurdle is, in part, one of seasoning. "We don't have long series of historical data to be able to determine with fairness what the prepayment risk is going to be."
That hasn't stricken mortgages from the cross-border agenda entirely, but it has forced originators to approach them differently from bridge loans. "We are exploring the opportunity" to sell RMBS offshore, added Zaltzman. "As long as we could do it in local currency, I think that's the way we should be going in the short-term."
Sofols like Su Casita, Metrofinanciera and GMAC Financiera have already witnessed foreign investors purchasing their domestic RMBS. By some accounts, 40% to 45% of the handful of Mexican RMBS issued so far is in the hands of foreign investors. What's more, issuing an offshore deal denominated in a local Latin American currency has a precedent. A string of Brazilian issuers, including the government, have placed bonds denominated in reais abroad.
While bridge loan growth is dwarfed by mortgages, the sector will still provide opportunities for cross-border issuance, as the shorter maturities and revolving nature make them amenable to a cross-currency swap. The next frontier for that asset class could be the euro market. "We've been thinking about it," said Metrofinanciera's Guzman. "We're getting some feedback from institutional investors."
For its part, Su Casita, has already tapped euro-loans through private structured deals, according to Zaltzman. While sounding optimistic about the European appetite for cross-border bonds, he added that Su Casita has sufficient funding to meet its origination needs in construction bridge loans for the next eight months. "After that, we're going to be looking into it."
Sofols have placed the domestic equivalent of over $1.3 billion in real estate-backed deals. Infonavit, which is the market's largest originator, has churned out three RMBS totaling about $304 million in local currency.
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