Over the past several weeks, the State of Mexico has been quietly pulling together a deal backed by payroll taxes, according to sources familiar with the process. With its unappealing national-scale ratings of BB+/BBB- by Fitch Ratings and Standard & Poor's, the issuer will need juicy enhancements to woo pension funds, which won't touch anything below the double-A level.

Right now the transaction is sized at around Ps2.05 billion (US$200 million) - a bulky size for locals but reasonable given the issuer collected Ps1.6 billion (US$156 million) in payroll taxes over 2001. The take has gone up every year since 1996 and should spike in 2002 following a 0.5% hike in the tax, to 2.5%.

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