With Mexican peso ABS in ascendance and cross-border Latin America offering scant innovation, it was only natural that the region's deal of the year would turn out to be domestic. The distinction goes to the country's debut RMBS, which paired originators Su Casita and GMAC-RFC's local mortgage lending branch and closed in December 2003, within the timeframe eligible for the award.
The transaction signaled what appeared to be an auspicious start to a hot market for real-estate Sofols - as special purpose financing companies in Mexico are known. Since then, issuance has lost traction, owing to M&A activity that has effectively plucked the choicest Sofols out of the market by offering cheaper funding via new parent companies. But even that recent damper on activity couldn't undermine the significance of the country's first genuine mortgage-backed security.
"This deal opened a new financing alternative for Sofols," said Maurico Jannet, managing director of business development at GMAC-RFC in Mexico. "It created liquidity for a product that was, until then, illiquid."
The RMBS was a first not only for the asset class, but also served as a peso-market debut for sole lead Credit Suisse First Boston, in what many rivals deemed a bold, if not risky, move by the originators. Other foreign names lent a cosmopolitan cast to the deal. Dutch development bank the FMO provided a liquidity facility, while the International Finance Corp. gave advisory assistance early on to Su Casita.
Local law firm Mijares, Angoitia, Cortes & Fuentes was counsel for the originators and Creel, Garcia-Cuellar & Muggenburg advised the lead.
The deal was, in a sense, the culmination of many years of preparation. As the first Sofol, Su Casita started up its real-estate financing business in September 1994, just months from the onset of the Tequila Crisis, which eventually sparked wide-scale mortgage defaults.
Undaunted, Su Casita originated its initial batch of mortgages in July 1995. Also that year, the World Bank started nudging Mexican originators towards standardization in order to facilitate the eventual emergence of RMBS, said Jose Raz Guzman, a partner at Mijares. While the crisis devastated many sectors of the economy, it effectively created a clean slate for the Sofols, which quickly displaced banks as the leading private originators.
"In 1991, there were banks offering about 60 [different] types of mortgages," Raz Guzman added, noting that over-diversification was corrected - in a manner of speaking - when the Tequila crisis effectively wiped out the asset class.
Other obstacles to RMBS fell away or became surmountable over a time frame of nearly a decade. State civil codes and onerous foreclosure standards each presented a daunting set of problems. And while investor appetite was to become an aching question mark ahead of issuance on Dec. 3 2003, in 1994 it wasn't even on the radar. Private sector pension funds known as AFOREs, which are now the peso market's liquidity guarantors, had yet to even begin operations back then.
"There were no long-term investors for long-term paper," Raz Guzman said.
Market volatility was also to blame. In the late 90s, for instance, local bank Bancomer tried its hand at securitization, only to see its ambitions dashed by the Asian Flu and Russian Default Crises.
The first whiff of an RMBS came from Su Casita in July 2000: a deal backed by mortgages that initially remained on the originator's balance sheet. "For us it was a dress rehearsal," said Su Casita Chief Financial Officer Manuel Campos. "It was like a securitization, but the issuing vehicle was Su Casita."
It was towards the end of 2002 when Su Casita began moving forward on a more proper RMBS. GMAC-RFC, meanwhile, was pressing ahead as well. "Our intention to do RMBS was made the day we decided to enter Mexico," said GMAC-RFC's Jannet. The U.S.-based originator set up shop in Mexico in 1999, and was a functioning Sofol in 2001.
After linking up, the joint originators needed to secure an underwriter. CSFB was not the obvious choice, as a handful of rivals - notably Deutsche Bank Securities and local brokerage IXE - had already proven their mettle arranging construction-loan ABS, and thus paved the way for Mexican RMBS.
In addition, CSFB was not merely inexperienced to real estate deals in Mexico - at that point it had not arranged any kind of bond offering in the peso market. As a result, the mandate sent tongues wagging at other shops, perhaps more than they normally do with a juicy new mandate. The question on everyone's lips: Why CSFB?
"We wanted a strong player and received a lot of commitment from the Mexico and New York office," said Su Casita's Campos, who had been jetting back and forth between the two cities to hear arrangers pitch. Working with a bank that had a wealth of RMBS experience in the U.S. and Europe was key, he added. "We needed to have an efficient model, not just a one-off," he said.
Also, rival bankers were probably underestimating the global bank's entree with local investors. "We already had a strong sales team in derivatives," said Jaime Martinez, CSFB's vice president of investment banking for Mexico.
With the selection of law firm Mijares - a veteran of real estate deals -players could start cobbling together the transaction. One pleasant surprise for the participants was that Mexican investors were willing to accept a pass-through structure, which was previously believed to be out of the question for the leading buyside names. "There was a general perception that they wouldn't accept the volatility of such a structure," Campos said.
Combining the portfolios of the two originators was another challenge. Su Casita's loans were, on average, smaller and its borrowers were from lower-income strata. And while Su Casita's origination funding came from government agency Sociedad Hipotecaria Federal, GMAC-RFC's came from bank facilities in the local market. Apart from size and borrower make-up, however, the loan pools are alike in various key criteria. "At the end of the day, the loans are very similar," said GMAC-RFC's Jannet. "They're all first liens, denominated in UDIs [inflation-indexed units], and with monthly payments."
Beginning in the mid 90s, Mexican states began amending their respective civil codes to simplify the transference of mortgages to a trust. While all the states that were chosen for the deal had complied by the time of issuance, the structure faced a curve ball with the documentation required by some states upon a servicer replacement. Since Su Casita was servicing the entire pool, the GMAC portion was subject to those rules.
Another road bump appeared when it became clear that a first-loss guaranty on the Su Casita pool being hammered out with the Sociedad Hipotecaria Federal would not be ready in time, prompting the originators to seek enhancement from a financial guarantor. They selected the FMO, which had set foot in Mexico by providing a liquidity facility in a construction loan ABS originated by Sofol Credito y Casa. In its dealings with that Credito y Casa, the bank earned a reputation for being nimble and keen on growing its guarantor business in Mexico.
Finally, an UDI swap with the SHF had to be transferred to the issuing trust. Since the paper is in UDIs, but the underlying mortgage payments are a multiple of the minimum wage index, the swap was necessary to protect investors.
Finally, on Dec. 3, 2003, following roadshows in Mexico City and Monterrey, a total of 12 investors bought in.
Following this breakthrough transaction, in 2004 were further RMBS by government agency Infonavit - the country's single largest originator - and by fellow Sofol Metrofinanciera, which, as of press time, had plans to issue a cross-border transaction in the near term.
But foreign banks snapping up Sofols have thrown a damper on issuance, as they provide funding terms that bond investors can't beat.
"[This M&A activity] will no doubt have an impact by reducing the volume of what would have otherwise been securitized," said CSFB's Martinez.
BBVA Bancomer recently purchased Nacional, the largest Sofol, which immediately torpedoed an RMBS that was in the works with arranger Acciones y Valores, a unit of Citigroup. Scotiabank, meanwhile, has announced plans to purchase an 80% stake in Credito y Casa. And even Su Casita, which co-pioneered the asset class, has not been immune to the overseas shopping spree. Published reports have Caja Madrid, Spain's second largest savings bank, buying a 25% stake in the originator.
But in a heartening sign, the originator has indicated that it has no plans to jettison plans for more RMBS. And GMAC-RFC's newly created conduit, which opens the market to smaller Sofols, could help offset some of the effects of the M&A activity.
Copyright 2005 Thomson Media Inc. All Rights Reserved.