Mexican investors have midwifed a new business niche for the rating industry by encouraging trustees and common representatives (see inset, p 22) to seek standardized evaluations. "About a year and half ago, the pension funds sent trustees and common representatives a set of criteria that we thought they should be following," said Alberto Cordova, technical director for Amafore, a trade group that represents the country's pension funds, it's leading institutional investors. Eventually, some trustees and common representatives concluded "a rating could be the best way to show [investors] that they're complying with what we require," he added.
Indeed, Standard & Poor's has already launched a product for evaluating these players, a service that the agency has provided in Australia since the 90s. S&P rated local brokers Monex Casa de Bolsa "Above Standard" as a common representative and earlier this month gave Banco JP Morgan an "Excellent" tag for both its trustee and common rep businesses. In descending order, possible rankings are Excellent, Above Standard, Standard, Below Standard, and Weak.
"We only launch this product where there's a need and in Mexico there was one," said Juan de Mollein, director of emerging markets structured finance at S&P. While there is no regulatory requirement to obtain a rating, the pressure from investors will no doubt be enough for some, if not most, according to sources. A few investors have even said they would buy a securitization if the trustee or common rep involved were not rated, according to Cordova.
The buyside is particularly concerned that the common rep - whose primary mandate is to represent investors' interests - be a strong entity with a solid track record and rigorous surveillance capabilities. There are about 12 common reps in Mexico and slightly over half are active, according to de Mollein. Since trustees can wear more hats, there are more of them in the market, he added.
While it has yet to release a rating in this sector, Moody's Investors Service has already launched its own nomenclature. The agency's MxTQ - Mexican trustee quality - ratings will run from one to five, with one being the highest. "We are speaking to some trustees and common representatives," said Brigitte Posch, a vice president of the structured finance group at Moody's. She added that the makeup of the industry is different from the U.S., where large global banks dominate. "Here you have the big international banks involved, but you also have local banks," Posch said.
Fitch Ratings analysts in Mexico could not be reached for comment as of press time.
The role of common reps was forged after the Tequila Crisis of the mid 90s triggered widespread defaults and severely eroded investors' confidence in Mexican debt. Cordova said that, while there had been no specific incident with reps or trustees that spurred the recent push for comparable evaluations, institutional investors had begun to notice that there were differences in how trustees and reps were approaching their business. Those differences were not being measured in any way, according to sources. "It made us more vigilant," said Amafore's Cordova.
Banco JP Morgan has worked on 210 transactions in three years, extending trustee services to 155 deals and acting as common rep to another 35, according to a report by S&P. In the bond market, the bank has a 29% market share in trust services and 18% as a common rep.
The bank has clearly taken a bite out of the market share of Monex, which played a key role in renegotiating debt in the immediate aftermath of the Tequila Crisis. It was only in the last two years that JP Morgan and another formidable rival, Scotiabank Inverlat, ousted the long-time top dog and took 21% and 23% shares, respectively, of the common rep business for medium- and long-term issues that came out between January 2003 and December 2004. Other investment banks that have grabbed a chunk of this business during this time frame are Invex (11%), BankBoston (18%) and Arka (7%).
Monex has been a common rep on more than 200 public and private transactions for over the last 10 years. Some 61 of those issues remain outstanding.
Interest in the product is apparently migrating south to Argentina and Brazil. Investors in Argentina are understood to have pressed for trustee ratings a few years ago. Then the crisis erupted and the lack of those evaluations became the least of investors' worries. Now with issuance picking up, even on the cross-border front, talk has again turned to that possibility.
Common Representatives in Mexico
Roles and Responsibilities
Authorize the trust's debt issuance
Verify all authorizations related to the debt issuance
Verify the existence of assets of the trust
Oversee fulfillment of the terms and conditions of the debt issuance
Calculate the interest and principal payment of each period
Execute the debtholders' rights for the payment of interest and/or principal
Call and lead debtholders' general assembly for the custody and safekeeping
of the trusts assets and beneficiaries' interest
Provide functioning reports to debtholders.
Source: Standard & Poor's
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