In late August, an entity of the State of Mexico known as IFREM originated a roughly Ps4 billion ($306 million), 20-year deal backed by flows from property registration fees. Structured by MBIA unit LatAm Capital Advisors (LCA), the transaction was novel on a number of fronts.
For starters, there was the choice of guarantors on the A tranche for Ps2.77 billion and the B tranche for Ps1.3 billon. The Overseas Private Investment Corp. (OPIC), a development agency that structured finance players in the region know about primarily from its cross-border participation, guarantees the A notes for up to $250 million in interest and principal payments. Meanwhile, the Andean Development Corp. (CAF), a regional development institution with 18 member countries, guarantees the B tranche for up to 30% of the outstanding amount.
The guarantees, among other enhancements, helped the transaction garner triple-A ratings on the national scales of Fitch Ratings and Standard & Poor's. Citigroup unit Acciones y Valores and HSBC placed the deal.
The deal marks the first time OPIC provides a guarantee on a local-currency capital markets issue. The agency recognizes the critical importance of home-grown funding for certain sectors.
"OPIC is very supportive of domestic capital markets as the optimal venue for long-term infrastructure funding, as it matches institutional investors such as local pension funds with alternative yet attractive options to investing in government bonds," said Geoffrey Tan, director of structured finance at OPIC. "We would welcome any opportunity to assist in such issuances where the participation of an institution like OPIC is seen as critical to success."
OPIC is familiar to LatAm ABS devotees as a provider of political risk insurance (PRI) on cross-border deals. That product had a good deal of traction leading up to Argentina's breakdown in 2002. But in the aftermath, deals backed by PRI defaulted and investors found they couldn't draw the policy since the devaluation event that triggered the crisis wasn't covered. It seems some had conflated PRIs with guarantees that cover credit risk.
The Mexican deal does not necessarily mean cross-border activity is off the table for OPIC, Tan added, saying that its push into the domestic arena does not make it any less likely to support cross-border deals. "Each transaction and each local capital market has its nuances, and each financing much be tailored to its circumstances and environment," he said.
Given OPIC's mandate to support the development of emerging markets with the participation of the U.S. private sector, it might not be immediately apparent how the transaction fulfills the second part. After all, apart from LCA as the structurer and financial advisor, the major participants are local. What fulfills the requirement is that the issuer, PROIN, is a company owned by LCA, as well as the fact that MBIA Insurance Corp. insures up to 30% of OPIC's own exposure.
CAF officials did not return requests for comment, but the deal is understood to be the organization's first foray into capital markets.
Another novelty of the transaction is the collateral itself. "This is the first time this source of revenue is securitized in any country in the world as far as we know," said Eugenio Mendoza, CEO of LCA. The flows are linked to fees for registering property on both the residential and commercial side. For the State of Mexico, IFREM has a monopoly on collecting this fee.
While there's no requirement for registering property in the state, its use has increased over time, with flows showing a compounded average annual growth of 14% between 1998 and 2009. "If you want to make sure the guy who's selling you the house owns it, you want to have that additional security," Mendoza said. This holds true for the commercial space as well. The growth of mortgages has also spurred the use of the registry, as banks tend to require registration.
Growing use of property registration applies to both good times and bad. Even in 2009, when Mexico's economy contracted 6.5%, the registry flows were up 1.2% in nominal terms. "You have banks foreclosing on property and registering the foreclosure and then re-registering in the sale," Mendoza said. "In addition, the government has enacted policies to support the housing market and promote mortgage-related credit. The registrations have become a key piece of infrastructure."
The bulk of the deal's proceeds will be used to modernize the institute in order to bring it up to international standards. "The modernization of the IFREM...will enhance the legal certainty of property titles and the ease with which such confirmation can be obtained," said OPIC's Tan. Another portion will be transferred to an infrastructure trust being managed by the State of Mexico. The trust invests in transportation, health and other services.
The IFREM deal is the first sub-sovereign transaction in the country since the country's Supreme Court passed a final decision on a tax-backed transaction from the state of Sonora that was ruled unconstitutional in November 2009. The judges basically ruled that the securitization had to be booked as debt, which it hadn't been. This set a nationwide precedent for future deals, although prior transactions were grandfathered in the ruling. There appears to be some uncertainty as to whether booking as debt automatically means on balance sheet. The IFREM deal, at any rate, is on balance sheet.
