For monolines in Mexico, the rules of the game have changed. Last month, FSA, and shortly thereafter MBIA, announced that they had secured licenses to provide wraps locally.

Prior to that, FSA and MBIA - like others in the field - had to receive an exemption from regulators to insure public deals, which required them essentially to prove they were providing a product that was not being supplied by Mexican operators. But now that they have their licenses, FSA and MBIA are those Mexican operators.

New rules had played a part in convincing them that licenses were the way to go, but the motivation isn't as interesting as the effect on the business as a whole. With the change, other monolines now need to be licensed by Mexican regulators to insure public deals domestically.

Ambac, it seems, is next up. The agency is in the application process and expects to have its license by early next year, said Diana Adams, managing director at Ambac. But in the license queue, Ambac appears to be alone. An e-mail message from the government's division of insurance regulation said that the department had received only three requests for licensing of financial guarantees. Not applying for a license, however, doesn't mean a monoline can't guarantee any deals from Mexico. The cross-border and private placement markets are still wide open, sources said. At such monolines as FGIC and XLCA, both of which have been active on the domestic front, a definitive decision does not seem to have been made.

"We've been following regulatory developments in Mexico carefully and have been involved with local counsel there for about a year," said FGIC Managing Director Eric Rosensweig in an e-mail. "FGIC is still determining how best to serve this market for the longer term."

Wynne Morriss, XLCA's head of origination, went a step further but fell short of committing the agency to a license. "We are evaluating our options for best pursuing Mexican transactions, including the possibility of establishing a Mexican subsidiary (as FSA and MBIA have done)," Morriss said in an e-mail. Both Morriss and Rosensweig pointed out that lacking a license doesn't preclude wrapping deals in the cross-border and private placements arenas. "Even without a Mexican sub, there are plenty of opportunities in cross-border transactions," Morriss said.

Assured Guaranty managing director Jorge Gana struck a similar tone. His agency has yet to join its peers in Mexico's domestic market, but the country is certainly not off its radar. "We are studying the possibility of setting up a licensed affiliate down there, but we haven't taken the final decision," he said. Assured is also considering other options in developing its platform for Latin America, and, by extension, Mexico, such as possibly adding one or more dedicated positions.

Spreads have changed, too

Licensing isn't the only new feature in the Mexican landscape. Reflecting other markets, the pricing tone has altered in the past three months, and spreads have edged out. Structured finance issuance took a pregnant pause in August and most of September and has come back slowly. While monoline-wrapped transactions in the RMBS sector offer only a spare constellation of price points, MBIA's recent surety on a transaction from GMAC Financiera hints at where the broader product is settling following the global liquidity shock of past couple of months. The deal priced at a spread over the local treasury yield of 62 basis points, compared with 55 basis points for a comparable transaction wrapped by MBIA in July, just before the big chill descended on the Mexican market, but after there'd been a good deal of rumbling about subprime weakness and tighter liquidity ahead.

Earlier in the month, Ambac-wrapped RMBS were coming in at 46 to 47 basis points over. They had dipped below 40 basis points over in December. MBIA had obtained pricing well below that in Mexico, with its debut toll-road transaction in 2003 pricing at 24 basis points over Treasurys, but this was at a time when government yields were sharply higher.

The recent uptick in wrap yields might not be over. An MBIA-wrapped deal this week from Su Casita will provide more signs where investors see the right price for the guarantee. But it's clear that so far, the wrap has fared better than other products. An HSBC mortgage deal that came out in October, for instance, priced at 100 basis points over the benchmark, up from 70 basis points in March. Even state mortgage agency Infonavit saw its spread differential go from 78 basis points to 96 basis points between mid-July and October.

To be sure, Mexico's domestic market overall has been less affected by the retreat in liquidity and the subprime scare than the structured arenas in the U.S. and Europe. What's interesting is that the monolines don't appear to be penalized at all by their association with trouble spots in these markets.

"There is a widening of spreads driven by the perception of inflation and, to a certain extent, by a perception of risk-reward in the marketplace," said Eugenio Mendoza, head of Latin America at MBIA. "You're seeing a differentiation of credit. Even though spreads have widened, there is a premium for investing in a monoline."

And it's not as if domestic investors are unaware of what the monolines have been going through. "Of course, we use credit default swap spreads to put a price on [wrapped] issuance," said Juan Carlos Pliego, fund manager at Afore Azteca. "In the last year, we've become much more specialized and risk-aware."

If anything, the spread widening could work to the advantage of the monolines. "As markets settle down, we actually believe the spread between unwrapped and wrapped deals will be wider than they were before," said FGIC's Rosensweig.

Some investors agree. "With the widening of these [monoline CDS] spreads, we haven't seen as much widening in the local issues," said one Mexican pension fund investor who holds monoline risk. Yet despite this discrepancy, he said the value of a wrap, as triple-A' global product, is inarguable. "Sure we're asking for more spread than what [the arrangers] initially intend when they open the book, [but] we think we're getting more bang for our buck," he said.

Fun with Farac

Whether there is more spread widening in store for monolines in Mexico, or the trend actually reverses, the guarantors will continue doing deals. Apart from the promised land of RMBS, a few of the monolines are keen on the infrastructure sector, which is, in fact, where MBIA made the product's domestic debut a few years ago.

MBIA, which has about $1.1 billion of wrapped deals outstanding in Mexico's domestic market, is attached to the financing package of the winning consortium in Mexico's biggest highway concession last summer. The winning bid, reportedly for Ps44.1 billion ($4 million), went to local construction company ICA, in partnership with Goldman Sachs. The idea is for MBIA eventually to insure a bond that would take out part of the bridge financing.

Mendoza said the agency is looking into other, similar deals. "We'll do different types of deals in the public finance area," he added: "Maybe something else before year end."

Other monoline sources said they were eyeing infrastructure. The ICA-awarded highway concession is only the beginning of a vast portfolio of projects held by Farac, the commission set up to rescue financially destitute highways in the wake of the mid-1990s' Tequila Crisis. As operating roads with history, many of these projects are considered to have investment-grade quality.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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