It was only a little over a year ago that Vicente Fox took his seat in office at the helm of the Mexican government. Now, with a newfound healthy financial system, investment-grade ratings across the board and more flexible pension-fund laws, the stage has officially been set for an advanced level of securitization; however, the question is, will investors bite?
The answer seems to be up in the air at this point, experts say. In the past, Mexico was No. 1 in the Latin American securitization arena, especially when it came to volume and number of deals completed. However, over the past two years the country has been on the sidelines as the securitization spotlight focused on Argentina and Brazil. According to Rosario Buendia, a sovereign analyst at Standard and Poor's, Mexico has evolved during this time and has been able to find alternate sources of funding that were impossible for other Latin American countries to achieve.
"Doing a cross-border securitization in Mexico has to compete with very affordable local funding," Buendia said. "The markets are very competitive for both securitization and for plain-vanilla bonds, so that opens the question, is it economical, or, for which companies does it compensate to do a cross-border securitization?"
However, a new generation of securitized deals might make the Mexican market attractive to first-time investors. While Brazil is expected to be the deal hog of the year ahead - the market is currently closed to Argentina - some market players are sure that within the next two years, Mexico will be leveling the playing field with more complex transactions that it has not been able to undertake before.
Furthermore, according to Buendia, there are now benefits to securitization in Mexico. It offers longer term paper, and it has become more economic to securitize assets in the country because the transfer and convertibility risk has been reduced. "In principal they don't have sovereign constraint to issue a triple-B minus," Buendia said. "Before you needed some type of external enhancement to deal with transfer and convertibility, now you don't need it. It removes one of the costs of doing the deal."
Foreign influx, pension funds
In addition to more technical deals, many foreign banks have made inroads into Mexico, including Citibank's purchase of Banco Nacional de Mexico (Banamex) and Banco Santander's recent presence in the country. "With a group of foreign financial institutions and law firms now embedded in Mexico, it has made available new products that would otherwise not have been available in the Mexican market," said Eduardo Ramos Gomez, an attorney in the Mexico practice of Thacher Proffitt & Wood.
The country's involvement with the North American Free Trade Agreement (NAFTA) has provided deeper real and financial-sector integration with the United States. According to S&P, tighter North American integration has raised Mexico's prospects for medium-term growth and lessened its vulnerability to shifting investor perceptions.
Further, the country now has a new flexibility with pension funds. Over the past year, Mexico has obtained investment-grade ratings from Fitch Ratings, Moody's Investors Service and S&P. Additionally, the government has worked to clean out the country's financial system. In fact, the most recent news springing out of Mexico has been the latest initiative to ease pension-fund laws. Last month, the pension-fund regulator changed the eligibility criteria for these products.
Prior to the change in the law, the government only allowed investors to invest in double-A rated assets or better, and that could only account for up to 35% of the portfolio. The revised guidelines do not set allocation restrictions for triple-A rated securities, which include corporate and asset-backed bonds. "The change in the law is partly driven by the fact that pension funds are growing so quickly and they have such a high volume of investable assets that they need to diversify," said Doug Renfield-Miller, managing director in specialized finance at Ambac. Other market sources agree, saying that more than 90% of the funds were comprised of government obligations - which pension funds in Argentina found is not a good place to be - and therefore there is a need for diversification. "It's just going to increase the appetite for single-A transactions," said Renfield-Miller.
Mexico not only survived the Tequila Crisis in 1994, but also endured a major debt default during the 1980s and, according to sources, reacted better than most to the Asian crisis in 1997, Russia's debt default in 1998 and the devaluation of the real in 1999, mostly as a result of the policies assumed during the Tequila Crisis, sources say.
And now, while countries around the globe, especially emerging markets, are struggling to keep afloat in times of a global economic slowdown, Mexico seems to have been a shining star: the country was assured macroeconomic stability in 2001, despite the sharp fall in the rate of growth in the economy.
"Overall, I think Mexico has done real well," said one investor. "I think Mexico has made a lot of great strides and they have improved the health of their financial system. They have really benefited from NAFTA - I think they are doing a great job; it's not 1994 anymore."
In the past, while existing asset-backed deals have been brought to the local market, only future flow transactions have reached the cross-border market from Mexico. Market participants agree that the improved financial system, investment-grade ratings from the three main rating agencies and eased pension-fund laws will allow issuers to go to the next level of securitization.
For years, Mexico has had an active future flow market, by which deals with dollar-denominated assets based offshore are issued in dollar debt. It has also seen an increased intensity over the last couple of years in transactions where local currency assets are securitized within the country. However, Mexico now has the ability to carry out transactions that allow local currency assets to be sold offshore in dollar-denominated debt.
"One of the interesting challenges for securitization in Mexico in prior years has been currency issues. You generally couldn't get a swap that was longer than about three or four years," said Jeffrey Stern, an attorney with Thacher Proffitt & Wood. "I think the availability of longer-tenor swaps to dollars - as long as, perhaps, seven years - has really enhanced the ability to pool peso-denominated assets and issue dollar-denominated bonds."
According to Stern, the beginnings of a local peso market that is able to buy asset backed securities are also in place. "Those two phenomena are going to start to have an impact on the growth of this market, where in prior years they represented a brake on the growth because Mexico was not rated investment grade, the currency was considered more volatile, you couldn't get price-effective currency swaps and the local markets for these securities was extremely limited," Stern said. "All these things have changed and I think it's going to accelerate the growth of the securitization market in Mexico."
New investor pool
"Essentially you will see a flurry of smaller deals that are done in the local market and then after an organization has done a few of them, they'll start doing them on a cross- border basis," said Stern. "Ultimately it's going to have to be done in a cross-border process because the Mexican market is not deep enough yet."
With the possibility of new types of transactions emerging from Mexico, there is bound to be a more diversified pool of investors and an array of new players. Mexican states are among the newcomers to the structured markets, as many are now looking to securitize cashflows. According to Thacher Proffitt's Ramos Gomez, the new political and financial environment has enabled the state governments to seek out alternate sources of funding. "They are seeking opportunities and trying to do deals that would have been unthinkable in prior years," he said.
In the past, investors looking at Mexico have primarily been future-flow oriented. However, now equipped with the ability to carry out various types of deal structures, analysts expect that investors who focus on asset-backed deals, mortgage-backed transactions, CBOs, CDOs, CMBS, and RMBS deals will begin to look at Mexico.
But what exactly will the investor appetite for these new transactions be?
Although the country is on an upward incline, there are some reservations among investors. "Our concern is that they are investment-grade now, that's true, but we would still be hesitant to do a lot of peso-denominated deals just because of the currency mismatch," the investor said. "Why would they be borrowing in dollars if the underlying assets are in pesos? I think they can go to the next level [of securitization], but I don't think it's going to be a huge market."
Some analysts agree that although there is not much correlation between the two countries, the never-ending downward spiral for Argentina has made investors in general a bit wary of the entire Latin American region. "Things are going well right now [in Mexico] but as we know, things can go south pretty quickly," the investor said. "If you look at the BHN deals that were done in Argentina, they securitized mortgages, but when they devalued the peso, people weren't able to pay their mortgages back and their mortgage-backed securities got downgraded, so it's the same sort of issue over there you want to make sure there's a reason they are borrowing in dollars."
But there are still some significant differences between the two countries' situations. Argentina has never been rated investment-grade in foreign currency, and according to the sovereign analyst, non-investment grade countries have a different risk profile than investment-grade countries. And the fact that the Mexican economy integrated with the U.S. makes it entirely different. "The other Latin American nations are our sister countries and they are our family and we love them dearly," said Ramos Gomez. "However, I do think that investors differentiate among these countries, so that the Argentinean crisis, as an example, has not significantly affected our stock exchange or our investment flows."
While some investors will be more apt to look at Mexico going forward, there are those that are still hesitant. "I think it would be a difficult place for me to play in, in peso- denominated deals," the investor said. "But as the banks are much healthier now than they used to be - all the banks are owned by big western banks... the health of the financial system is much higher than it was several years ago. I don't think you can compare Mexico and Argentina, but I think you just have to remember what [currency] matching is - you don't lend in dollars if the people are earning pesos."