The sleeping giant of Mexico's securitization market is awakening. Once confined basically to bridge loans for construction, the housing sector could turn out the country's first true MBS by 1Q02. Now in the works is a master trust combining mortgages from several SOFOLes (Sociedades Financieras de Objeto Limitado), special purpose financial companies that provide housing funds to construction companies and to low-income individuals. The trust could hit Ps10 billion (US$978.9 million), with multiple issues the most likely scenario.
"We might see the structure emerge by the end of the year," said Juan Pablo de Mollein, associate director at Standard & Poor's Structured Finance Group in Buenos Aires. Total MBS issuance for 2003 could hit Ps13 billion (US$1.27 billion), particularly if the market gets started early on.
The fairy godmother of this maiden sector is the Sociedad Hipotecaria Federal (SHF), a government-owned entity that boasts triple-A ratings on the national scale from all three international agencies. On the global scale, Moody's Investors Service has also assigned SHF a local-currency Ba3', citing total guarantees from the federal government and moderate, though somewhat untested, risk.
SHF has opened an application process for SOFOLes interested in contributing to the first master trust, according to Alan Elizondo, vice-president of risk management and planning at the government agency. The mortgages must meet certain criteria in terms of financial structure to be included. Each mortgage on average will be about Ps220,000 (US$22,000). SHF aims to provide a first-loss guarantee of about 25%. Additional enhancement in the form of subordination and bond insurance are on the agenda as well. SHF has not yet chosen a bank to issue the deal.
With a bulky pool of residential mortgages ripe for securitization, it may surprise some that an MBS market hasn't already taken off in Mexico. "There weren't guarantees available for these bonds before," Elizondo said, referring to the days before October 2001, when SHF sprang to life. Providing guarantees was not the mandate of the Fondo de Operacion y Financiamiento Bancario de la Vivenda (FOVI), a government sponsored housing program administered by the Central Bank until SHF was created.
Before the government agency stepped in, securitizing mortgages was simply too expensive for originators, sources said. What is more, only the biggest SOFOLes - with plenty of overcollateralization to offer - have ventured to do deals backed by bridge loans for construction.
SHF extended its first enhancement just two weeks ago, when the agency provided a 14.2% guarantee to a seven-year, Ps500 million deal structured by IXE Casa de Bolsa. (see ASR 9/23 p.20) Housing loans originated by Metrofinanciera, the seventh largest SOFOL, are backing the bond, which is already on roadshow. Pricing is slated for the third week of October. SHF's guarantee led Moody's and S&P to assign the deal a triple-A. "Everything's going well with demand," said Fernando Prieto, deputy director of corporate finance at IXE.
While potential MBS players will be watching to see how Metrofinanciera's enhancement plays itself out at pricing time and beyond, others are looking further ahead, to the long-awaited birth of a crossborder market. "Converting from a Latin America currency always creates hurdles, [but in Mexico] you can now get a seven-year peso hedge that is not outrageously expensive," said Jeffrey Stern, a partner with law firm Thacher Proffitt & Wood. And once the MBS domestic market gets started, providers of devaluation and sovereign risk insurance are sure to come around, sources say.
But for the foreseeable future, MBS is likely to stay domestic. Maturities are expected to run from 10 to 15 years and buyers will be insurance companies.
Sources say the application process of joining the master trust is creating a standardized procedure that bodes well for individual SOFOLes to debut their own MBS next year. Previously, each SOFOL had its own origination process, one of several peculiarities, sources said. "The SHF is unifying the criteria," said S&P's de Mollein. Some of the SOFOLes keen on joining the trust are heard talking their own side deals with investment banks as well.
