Mexican states and municipalities keep swapping securitized debt for bank loans (ASR, 2/13/06) and the State of Mexico is next up to take advantage of overflowing liquidity in the banking sector, according to sources.

The issuer was toxic to lenders only a few years ago, leaving it few options but to securitize its co-participation revenues and hope market-based investors would bite. Now Banco Inbursa is dangling conditions before the state that trump those of its remaining outstanding bonds, which number two from an initial six.

The issuer will retire the bonds with a loan of roughly Ps750 million ($70 million), according to a source close to the deal. The state had already wiped out its other four deals with bank debt last year. The Inbursa loan will mature in 2012. Backed by payroll taxes, the notes were set to mature in 2007.

The initial placements issued by the State of Mexico went primarily to retail and investment funds. Pension funds were turned off by the mxA' national scale rating from Standard & Poor's. Fitch Ratings gave the deals a AA(mex)' on the national scale. Santander Investment was the issuer and Protego Asesores was the structuring agent.

The municipality of Guadalajara redeemed a securitized bond two weeks ago with proceeds from a bank loan. The outstanding size of the bond was Ps656 million. The terms of the loan, unavailable at press time, were apparently generous enough to justify Guadalajara paying a Ps8.5 million premium for early redemption.

The municipality issued the transaction in December 2002 via Santander Investment. The collateral included federal co-participation revenues, which are funds that the central government distributes to sub-sovereign entities.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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