A new financing vehicle is poised to take off in Mexico, and it has structured finance players scrambling to make deals. What's interesting is that, at its core, it's an equity product.
Boosters of capital development certificates (CCDs), as they are known, see them as an unprecedented opportunity to invest in infrastructure and other sectors of the economy sorely lacking in capital. ABS devotees are involved in part because Mexican banks and the local offices of international banks typically have teams that are too small to divvy up work on a corporate debt/structured debt basis. Indeed, often the equity and DCM people are on the same team.
But more importantly, CCDs incorporate some of the technology used in a standard asset-backed security.
"It's a hybrid," said Victor Gonzalez, director of investment banking at IXE Casa de Bolsa. "We use a trust, the same as for a structured product, and from the disclosure and documentation requirements, it's more debt than equity."
A cousin to Income Trusts in Canada or Special Purpose Acquisition Companies in the U.S., CCDs are issued off a trust that has purchased certain kinds of cash-generating assets, including common stock. Payments to the final investors are variable. Under new regulation, local pension fund administrators (afores) - which aren't allowed to purchase individual stocks in companies - can essentially do so via CCDs in four of the five fund types they manage. Of the Ps1 trillion ($73 billion) afores now control, they can allocate Ps83 billion to CCDs, according to a recent presentation by IXE. And that figure is consistently growing.
IXE estimates that, by adding other kinds of leverage, the amount available for projects and companies funded via CCDs is around Ps400 billion. CCDs do not have to be rated, and each trust must have at least 21 investors. Projects financed through the mechanism must be within Mexico's borders. The certificates can be structured as either straight equity, mezzanine or tracking stock.
Several deals are already in the pipeline.
One, for food court franchiser Arrachera House, will issue up to Ps1.1 billion in certificates, according to Gustavo Meillon, a senior associate at SAI Consultores, the structurer of the transaction. Arrachera's CCDs will pay investors a share of the sales generated by the company's food establishments. That share adjusts during the life of the deal.
Australia'sMacquariehas gotten in on the act as well, registering a deal for up to Ps15 billion, a colossal sum by local standards. Placement agent Credit Suissedid not return a request for comment. In addition, government road concession Farac, which is being handled by Goldman Sachsand local companyICA, was slated to issue CCDs last week via Santander Investmentand Goldman, according to sources.
Finally, Marhnos, an infrastructure company that has developed more than 1,000 projects over the course of 55 years, also just registered CCDs for a total of up to Ps2 billion. Over the course of three years, the funds would be channeled to infrastructure projects overseen by Marhnos. Once the projects start to generate income, this will be transferred to CCD investors through dividends and capital reduction. IXE is the placement agent. Other companies or developments looking into CCDs are developers Grupo LarandCorporativo Tres Marias.
Most CCD opportunities are expected to originate in the infrastructure sector, from investments that have a lifespan of 10-to-30 years. While i-banking resources and manpower have certainly shifted to CCDs, players said the new product shouldn't be viewed as an ABS rival in infrastructure and other sectors.
Chadbourne & ParkePartnerBoris Ottosaid CCDs could, in fact, be complementary to securitization. In particular, CCDs are expected to work well in the first stages of infrastructure development, whereas securitization is often a complicated proposition for greenfield development, Otto added.
CCDs are not completely new, but regulatory tweaking earlier this year, particularly by pension fund regulator Consar, has set the sector ablaze.
A single deal precedes the current rush. It included a zero-coupon bond, which is no longer required. Issued by timber and cattle company Agropecuaria Santa Genoveva in July 2008, the transaction came to Ps1.65 billion and had a final maturity of 20 years. A portion of the proceeds went to purchase a zero-coupon bond that ensured investors would have their principal protected at the triple-A level on the national scales of Fitch RatingsandStandard & Poor's. The agencies assessed only the likelihood that the investors would get their principal back. The rest of the proceeds of the deal - and where all the upside resides - went to purchase land. Timber sales from that property will flow back to the bondholders.
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