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Saturday, 18 November 2017

IFR Mexico Roundtable 2007: Part 1

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IFR: What is the outlook for peso financing this year and what impact has the volatility in the US had on Mexican markets?

Ricardo Fernández (Credit Suisse): Regarding what has happened in terms of the impact from global markets versus what we have seen locally, we have not really seen issuers coming to market after this turmoil. So it remains to be seen what is going to happen. It is more an issue of pricing rather than credit. In Mexico credit issues are more isolated than what they have been in the general markets. All the talk about reforms, both fiscal and electoral, is keeping the market a little more bullish than the general tone.

Ricardo Cano (Bancomer BBVA): I agree. One of the factors that has helped isolate the Mexican market from what is going on in the international markets is that over the past few years we have seen a very conservative approach in terms of what investors have been buying locally. That is in terms of the both credit ratings and structures.

This has been a market that has been very concentrated on plain vanilla, top-rated corporates, as well as structured transactions that are also very top-rated and have very diversified cashflows behind them. So you do not have the aggressive structural transactions that we see in other markets.

You don't see a selloff in Mexico. Local institutional investors have a lot of liquidity and the money keeps flowing in. They have to invest and they really do not have reasons to sell off because you do not have the credit concerns in Mexico that generally speaking you have in other markets.

IFR: What about secondary markets? How liquid are they and what does this mean for the repricing of assets once the primary market picks up?

Cano: The secondary markets in Mexico are very limited. There is liquidity for certain transactions that have come to market in the last couple of years, but you do not have people really looking to sell. There may, however, be a concern about the primary markets in terms of when we might see a lot of new volumes. But in terms of the secondary markets, investors are pretty comfortable with the portfolios they have today.

I don't think you are going to see a lot of secondary market activity and therefore it is truly hard to see where the pricing levels of previous transactions are in the market today, because you do not have a lot of trading.

Investors aren't looking to unload paper. There may be some trading opportunities and there is some liquidity. But it is really more of an opportunistic type of market rather than one where investors are saying, “let us unload our portfolios or let's try to change the way we look at credit and therefore we need to move portfolios around.” You do not have that going on in Mexico.

IFR: From a borrower's perspective, how intense do you think repricing will be? Will you be paying much more than you did before the volatility?

Ricardo Rivera (America Movil): There has been very little room for different market participants to show effective pricing on some of the possible deals we could do right now. We know that in the US at least there is still some appetite for credit. However, it is at a spread which, at some points of the curve, is even 30bp–40bp wider than what we had just three months ago.

In Mexico, it is a different story. That's because interest rates have been maintained at fairly good levels. Right now in the US interest rates are coming down, but Mexican interest rates have been very resilient and so far what we have seen is that the spread increase that exists right now in Mexico versus the spread increase that you have in international markets is much lower.

Last year we mentioned that probably the most attractive market in terms of cost was Mexican pesos. I believe that today, given the shift in the curves, pesos are getting very close to US dollars. However on a spread basis it is still relatively attractive to other currencies.

Jorge Parra (Hipotecaria Su Casita): I concur with Ricardo, but I think we have to look at the big picture. Again you have some analysts that are very bullish, while some are very bearish on the whole global economic outlook.

The question is what would happen if the US goes into recession? You have to realise Mexican exports to the US represent 80% of total exports. And they are very diversified, so if the US goes into a recession, it won't be only one sector that will be hit. You have the whole economy that will be hit and so we have to see how that impacts the local markets.

Guadalupe Merino (Pemex): I think that the optimism over the reforms might just dry up in the next few days. You have the buy-the-rumour, sell-the-fact type of behaviour that you sometimes have in the market. So it may soon go back to looking at what is happening in the US.

Humberto Cabral (Banamex): In terms of repricing, in the last couple of years, we have experienced a very important decrease in spreads not only in Mexico but globally. This decrease was basically driven by the excess liquidity that we have seen in all markets.

One of the main lessons that has emerged from this volatility is that there is a clear repricing in every potential credit. We cannot be sure yet of the impact on Mexican local markets because we have only seen a couple of deals since the volatility started. But we expect that repricing in Mexico will be less than in the global markets because of the excess liquidity and appetite coming from our institutional investors. But at the end of the day, we have to recognise that the market has changed and that institutional investors' views on credit risk is different.

We also expect investors to be more cautious on what type of securities they are going to buy. We expect them to be more focused on high-grade issuers. But as everyone knows 90% of this market is based on investment-grade transactions, and I think that is partly why the volatility will have a lesser impact. But if you show investors a non-investment grade borrower, you can't be sure what will be the next pricing for this type of credit.

The market has recognised the impact of the reforms. It will be bad news if these reforms aren't passed. But if they are, I think the market is clear about what they expect. The volatility and the performance of the market are more driven by external volatility.

Cano: Just to go back a second to Jorge's comment about the potential impact of the US economy. What are the effects on the Mexican economy? There are some valid questions being asked about what could happen to the Mexican economy given the nature of its exports. But in terms of the capital markets in particular, I am less concerned given, as Humberto said, that it is really an investment-grade market and the typical Mexican issuer is a company that is better rated and less levered than it was three or four years ago. Companies that have already issued paper in the local markets are not going to be that affected by any potential impact on Mexico's real economy.

On the other hand, it could impact any transition that this market has been trying to make over the last couple of years. In other words, the efforts that have been made to include non-investment grade names. That trend has been advancing, but I am not sure how that is going to change. Are we going to continue to be able to bring non investment-grade names to the market, or not? That is where there could be some concern.

Eduardo Uribe-Caraza (Standard & Poor's):Following the same thought, if the US goes into a recession, it will certainly affect Mexico as a net exporter [to that country] and will impact companies as they would probably have to pay higher interest rates.

But on the positive side, liquidity in the global markets is still there. It is growing not only in the US but also in Asia and in Europe and of course Mexico. So all that liquidity will provide money for companies that are performing relatively well, and will allow them to continue to grow. Even this situation in the US sub prime market has not really affected investment-grade companies. They continue to access the market, though at higher spreads. I think that also applies to Mexican companies that have issued in the local markets. As Ricardo said, most of them have been rated investment grade.

Nicolas Boulay (Calyon): I just wanted to mention what is happening in Europe, at least in August, which was the slowest month since the beginning of the '90s for investment-grade and the high-yield bond markets. So the uncertainty in the market has had a strong impact and people are probably just waiting a few weeks to see if the market will recover.

Regarding liquidity, I agree with all of you, institutional investors in Mexico are still very liquid. Every month, they receive money from their customers so they will need to go to the market.

Calyon is strong issuer of structured notes that we sell to the investors, and in August we had a real break in our activity because people were unsure about where the market was going. They were saying, “let's just keep our money overnight and then we will decide if we see a trend in rates or FX. Let us see whether the market will return to normal in coming weeks.” That is the big question.

IFR: What about infrastructure financing in Mexico? We have seen the rescue trust for the toll-roads, Farac, sell its first concession to ICA and Goldman Sachs for US$4bn. They are currently syndicating about US$3.7bn in the loan market and that is expecting to be taken out in the bond market at some point.

Boulay: Maybe I can comment because we have been invited, as many of you have, by Santander to participate in this financing. First this will be like a seven or nine-year bridge, and normally they expect to take it out within two or three years. So the big question now is: what will the take-out look like?

At first the bridge has to be in pesos because they want to match income with debt. We assume the Afores [pension funds] and other institutional investors will have appetite for very long-term toll-road type of debt, but we do not know what kind of rating the take-out would have. We know that pension funds look for high-grade debt. So the equity structure of the deal plus the debt service coverage ratio will be key in going to the market with this paper.

Uribe-Caraza: It all depends on how much you put into the project. But given that there are existing assets, you have a history of several years for these toll roads, more than a decade at least. You have evidence of how many cars have been passing through, and how much they have been charging and therefore how much cashflow they are generating. So this takes a significant amount of risk out of the picture.

The next evaluation is: how are you going to structure the transaction? Are you going to amortise all the debt or are you going to do a bullet at the end? If you put a bullet at the end, you may need some refinancing, which brings additional risk.

But overall I would say that at least the first package consists of four good toll roads, and that there is evidence of traffic volumes. You do not have construction risk because the toll roads are already built. There may be some additional expansion, but if you take out what is existing now, that should provide enough cash to serve a reasonable amount of debt. So therefore we would probably give it an investment grade, if they had adequate reserve levels and coverage.

Parra: You also have to ask that in addition to the toll roads, will the market be able to absorb all the mortgage-backed securities. MBSs have been around in Mexico for only four years and they keep increasing year by year. Housing as a percentage of GDP is around 11% and it is expected to grow to 20%–24% over the next 10 to 15 years. And MBS paper has the same term, duration and ratings as toll roads.

IFR: So can the local market absorb all the toll-road paper as well as MBS deals coming down the pipeline? I have heard that all of the Farac toll-road concessions could generate up to US$40bn–$50bn in financing needs.

Fernández: It is an interesting question and it is tough to answer. Certainly the way these structures were approached when they were bidding and the way they are going to take them out is completely different. I don't know if their debt-to-equity ratios are going to change, but I think so. The access to the local markets they were expecting will change as well.

The equity/debt mix is going to change and they will go back to the drawing board for the next Farac bids and input that in their IRRs and see if it still makes sense for them economically.

The same will happen for the mortgage-backed issuers like Su Casita. Obviously you have pools of assets and you have been giving loans to the markets at relatively lower rates than you were doing before, right?

So the loans that you are going to start to securitise now obviously have lower APRs, and the market is going to start charging higher spreads. There is also a mix there as to how much more sense it makes for you to do it with a certain structures versus other structures.

There is also the issue of all the monolines. On these Farac transactions, we assume they are going to be wrapped by monolines. But we know the monolines are under stress in the US markets at least in terms of where their CDSs are trading. How are investors going to look at that in Mexico and what spreads are they are going to ask for, even with a wrapped deal? That remains to be seen. It will be interesting to see how those structures and their economics will change.

Cabral: This is the type of asset class the market needs. We do not have an asset class right now for toll roads. The question is can the market absorb the amount or not? I think the amount is huge for our market, but if the leads have the capability to put together a strong structure, a local Triple A, or if part of this structure can have a full wrap, I am sure the market can absorb a substantial amount. But how much time does the market need to absorb this amount? My view is if they try to get this [Farac] refinancing through the local market, we are talking about at least three years.

IFR: I understand the government wishes to take a slow and cautious approach to the Farac bidding process so that they can ensure success and not put too much supply in the market at once?

Alicia Nunez (Mexico's Ministry of Finance and Public Credit): The pace at which the government will do the biding process will depend exactly on how the market absorbs it and on appetite for this biding process.

The first round of bidding was a huge success, and that was good news. People are very optimistic about the take down of this amount, although with the concerns that panellists have already expressed here. But I think the market itself will determine how rapidly this will be absorbed.

Whatever they can finance locally, they will finance locally. And if they have to combine that with other sources of funding, I am sure there will be appetite in other markets as well.

Cabral: This is not a matter of liquidity or appetite from investors. It is going to be a matter of the concentration of one project in specific portfolios.

 

Click here for Part Two.

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