As investors watched from a distance, Mexican investment bank Protego Asesores set out to prepare a palatable deal for the heavily indebted State of Mexico (see ASR 10/14, p. 17). As it turns out, Fitch Ratings and Standard & Poor's have passed judgment and their ratings may be enough to banish concern of the originator's risk.

"Clearly they're differentiating the deal from the state," said Luis Videgaray, managing director of Protego, structuring agent on the deal. "We've been working on this for a few months and had to overcome many obstacles."

Backed by payroll taxes, the transaction garnered an A' and AA' on the national scale, respectively, from Standard & Poor's and Fitch. Those ratings soar above the ones for the state, which are BBB-/BB+.'

Protego has registered Ps2

billion (US$196.8 million) under this program. To avoid overwhelming investors, issuing bank Santander Investment will probably float between Ps500 million and Ps1.5 billion (US$49.2 million-US$147.6 million) in an initial placement, sources said. The deal is due to hit the market between Dec. 5 and Dec. 12.

Marginalized by risk-wary banks, the State of Mexico has been looking to tap the markets for some time. "It's a great deal for the state. They've been taking out short-term credits to roll over debt," said a source familiar with the deal. The maturity on the deal is five years. Proceeds will go to public works.

Payroll taxes in the State of Mexico will reach an estimated Ps2.3 billion (US$226.4 million) for 2002 and rise slightly next year. The deal is heavily overcollateralized, with roughly 6% of the projected flows needed to make payments. The entire stream of payroll-tax revenue is flowing into a trust, with the excess after payment funneled to the state. One of the main risks of the deal is the fact that the taxes themselves are subject to state law.

As in other Latin American countries, Mexican investors traditionally demand a premium on securitizations, particularly those with elaborate, untested structures. Videgaray said that investors are warming up to this deal. "Santander's done a good job explaining the structure," he added.

Payroll taxes mark a departure from the traditional asset for securitization among subnationals in Mexico: federal co-participation revenues. "This is the first time you don't have an implicit guarantee from the federal government," said a source.

Meanwhile, it appears another subnational deal in the works is sticking to co-participation revenues. The city of Guadalajara is readying a deal heard at roughly Ps800 million (US$78.7 million). Santander is understood to have the mandate for structuring the transaction. Ratings are expected to be at or near AAA' on the national scale, give the city's rating of AA-' by Fitch and AA' by S&P.

Zapopan, a city that forms part of the same urban agglomeration as Guadalajara, priced a Ps147 million (US$14.5 million) in early September to yield 90 basis points over 182-day Cetes. That deal was rated triple-A on the national scale by Moody's Investors Service and Standard & Poor's.

Depending on pricing conditions, one or two Mexico City banks may surface with other deals this week and schedule them before Dec. 12. On that day, Mexicans pay homage to their patron saint, the Virgin of Guadalupe, and financial markets enter a lull until January. Last year, there was a brief flare up in activity before the holiday. That was partly the release of pent up demand following a few months of inhospitable markets, but a smaller-scale flurry of deals is still foreseen for this year.

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