For years a market outcast, the State of Mexico is undergoing intensive treatment to win over investors. Since Arturo Montiel became governor in late 1999, his PRI administration has pushed out debt maturities, tamed a beastly budget, and floated a novel program of securitized payroll taxes that has other Mexican states taking note. But the debt load is still unwieldy at nearly Ps30 billion (US$2.7 billion) - over 1.2x of revenue - and the assessment from ratings agencies is far from glittering. To be fair, both Fitch Ratings and Standard & Poor's have rewarded the state's austerity. The former upped its rating on the national scale to BB+(mex) from BB(mex), while the latter attached a positive outlook to its mxBB- rating.

The securitization of payroll taxes launched in December marks a milestone in the state's reform drive. Though its size must remain below 7% of combined debt, the program has bridged what was once a chasm between the State of Mexico and financial markets. No less important, it has catapulted this former laggard to the forefront of structured finance, as the first Mexican state to use payroll taxes as collateral. The total float is earmarked at Ps2bn (US$182 million). So far, the state has placed Ps1.7bn (US$156 million) in five separate issues, which have included both fixed-rate and floating-rate paper (see table).

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