IFR Mexico Roundtable 2007: Part 3
IFR: How are high-grade names such as Pemex viewing the bank market versus, say, bonds, local versus international, etc?
Merino: We have not been accessing the market that much. But definitely there is an interest in the local markets for paper like Pemex or the federal government, as there is in the foreign market.
One of the issues is, what can the government do to increase liquidity [such as bringing in more foreign investors]? We think the withholding tax issue is something that needs to be sorted out, so that we can do some issuance in Mexico that could be bought by foreigners.
Rivera: We still see a lot of interest from the diverse alternatives of funding that we have. What has become really interesting is that in the region there are substantial opportunities arising right now. A country that has not been hit at all by the turmoil in the international markets is, for example, Peru. We expect to do something in Peru fairly soon.
The need to look at new alternatives is what is created by this kind of market. However, I do want to emphasis that the threshold of costs for others countries is lower. Even for ourselves, we already have a structure in place, and programmes through which we can issue. However, it is time-consuming and it is costly. You need the rating, the auditors, etc. So I think further advances should be made to simplify the process.
My impression is that it is a little bit easier when you have a pressing funding need to go the US market. As long as you have the auditors in place, basically the only thing you have to cover are the legal costs, and that is it. The potential for new companies to tap the local markets should be quite big. Maybe not 300 but I can think of maybe 20 to 30 more companies that could access the Mexican market if the [costs] were lower.
IFR: Given that America Movil is a company that has tapped various local markets throughout the region, how do you compare Mexican local markets with others in the region?
Rivera: Mexico is far better than the rest. We took a year and a half to have a programme ready in Peru and we complain that in Mexico it takes a month and a half. Differences within countries are still very significant.
We have tried to do something in Chile, but authorities never got coordinated well enough. I think that probably Colombia is one of the other countries that is fairly advanced. You can go within a period of probably two or three months.
But for high-grade companies within the region, there are good opportunities in Mexico. You could have foreign companies issuing not only in a Europeso format, but if the process was simplified in Mexican pesos.
IFR: What about the possibility of other Latin American companies tapping the local peso markets?
Fernández: I think it is an issue of ratings. The number of companies that can actually achieve the ratings required by institutional investors in Mexico is very limited. So that is why I think you have not seen those issuers tapping the local market.
Uribe-Caraza: You have to develop a high-yield market in Mexico, because it does not exist. There are some names that are rated below the Double A category on the local scale and they are mostly placed with the mutual funds. You have to do a lot of work with these 20, 30, 50 companies in terms of having them provide information on a regular basis. There are many things that you have to develop in these types of companies to bring them to market.
On the other hand, these are good assets for banks, so some banks are not willing to do the work with these types of companies to bring them to market later. They are getting a good yield and it is a good credit for them. But I think that little by little the high-yield market will start developing in the country and you will see more companies issuing debt securities.
Fernández: Just one comment about the other side of the market, the super high-grade if you want to call it that. That is foreign issuers that are rated higher than the Mexican government. We continue to see them tapping the local market via Europesos or global peso deals. That is being driven by certain arbitrages they can get in the local market. It is also because investors are able to buy better rated credits than the sovereign but at spreads over the sovereign. So for local investors it is an interesting opportunity.
However, I wanted to ask the issuers about what they have recently seen in the Mexican commercial paper market and also in the bank market. Have you felt there have been some dislocations in these markets? In the US at least there have been huge dislocations in the CP market versus the long-term market. You have US Treasuries [yields] going down but CP rates going up. So there is a huge dislocation for issuers that were really depending on the short-term markets. It would be interesting to hear from issuers what is going on in our local market.
Rivera: We are in the process of setting up a CP programme in the US. Prices have obviously moved significantly in the US. However, as an international player that can fund itself at the short end of the curve either in dollars or in pesos, it makes the instrument extremely attractive. That's because you have the exchange currency play. If there is a sudden shift in the exchange rate and interest rates remain the same, then you might feel you want to fund yourself in one currency or the other.
We are still pursuing that issue and feel that the spike in US commercial paper rates is probably temporary. Just looking at it as an investment opportunity, GE and some other Triple A global corporates were paying close to Libor at some point. So we feel it is something temporary, and in the local markets I do feel it is being extremely resilient. Actually we did a couple of things in the local commercial paper market in August and we had absolutely no problem in funding. We did about Ps3bn in commercial paper. Obviously we ended up paying that fairly quickly, but we did see the appetite out there.
IFR: Did you have to pay a premium over pre-volatility levels?
Rivera: No. It was sub TIIE, so prices have not moved a lot in Mexico. Obviously it wasn't 50bp below TIIE, but it was still relatively attractive in financing terms.
Parra: From Su Casita's perspective, we have not seen any issues in the CP area. Spreads have probably widened 5bp to 8bp over the past two months. But we will see what happens over the next couple of weeks. That is for Su Casita, but we have seen other players having trouble accessing commercial paper. That is mostly because of rating issues they have had. But other than that we have seen the markets as the same.
Cabral: If you take a look at the commercial paper market in Mexico, we have not seen any negative effects in terms of liquidity and also in terms of spreads, especially if you access 28-day tenors. If you try to move to 91 days or six months or more, it is possible that you will have to pay a little more. But just to give you an example, GE established a programme in Mexico and they have raised Ps4bn in the last four weeks, and interest rates were sub TIIE. So I think this market is totally liquid and we have not seen any negative effects.
IFR: Just going back to the withholding tax and how that has discouraged foreign investors from participating in the peso market, Alicia I was wondering whether you could address how the government views this?
Nunez: We have been hearing a lot about the withholding issue for some time. To be honest I am totally convinced that this is not the only problem or the problem to address in terms of bringing more players to the market.
There are a number of reasons why people are not ready to target the market in terms of doing their homework. The clearing systems and legal work and things like that may also prevent certain players from going to the market.
We do realise it might be perceived as a large issue. I am not sure it is the only issue to tackle and we are not even certain that this is very different from what is practiced globally.
IFR: What is the government focusing on these days in regards to local market development?
Nunez: Already having a liquid market for governmental paper, we try to facilitate good secondary market practices. We get involved in things like the repos and securities lending, which is a market that unfortunately hasn't developed properly.
We have spent time talking to market players and trying to make progress on little obstacles that were still pending in terms of regimes and legal frameworks.
It is not clear that there is much left to be done. If you talk to different market players, you will get different answers as to why the repo and securities lending market has not developed.
Investors sometimes argue that it is not top priority or that they haven't invested in the systems. In that sense we do get involved to the extent we can. Sometimes there is a limit on how far you can go as a regulator or the government because sometimes it is just a matter of people taking the first step.
We also said we will review our policy in terms of inflation-linked bonds. We think that is particularly important with respect to mortgage-backed securities, and toll-road securitisations that may come.
When we started issuing 20 and 30-year inflation-link bonds, we only replaced what used to come from the Farac in terms of maturities. So it was just a substitution and we had been working on determining how large this part of the portfolio should be or whether it should be there at all.
Not every country has an inflation-linked market. Even in very developed markets, it is comparatively tiny and far less liquid than the nominal rate market. So that is something we are assessing. We did a survey with institutional investors to hear opinions, and we might be making some changes in coming months.
We are reviewing the tenors and the amounts, but we are convinced that it will continue to form part of the paper we supply. And we think it is important to have a real rate reference from the government.
IFR: How do you see the local derivatives market developing? Do local investors need a more sophisticated derivatives market to invest in lower-tier credits?
Boulay: What we see with institutional investors is there are still a lot of internal policies that limit them from buying derivatives products. So from our perspective we sell a lot of institutional notes in which we can embed several strategies, be it equities or FX or interest rate derivatives. But they have to prove to Hacienda that they have the proper risk management for this. So it is a long process and I understand why they are very cautious to move into these products and they want really to do it on a step by step basis. It will take time before we see a strong capacity from these investors to buy such products.
Cabral: Until 10 years we have a very liquid market not only in interest rates swaps, but also for cross currency swaps. But beyond 10 years you need to come up with tailor-made solutions.
Rivera: Structured products that have embedded derivatives are one of the things that we have seen exploding a little bit, especially in the last year. I assume it is only because of the amount of liquidity that there is out there. It is quite amazing how all the participants in the market have begun to use these kinds of structures.
IFR: Who is buying these products?
Rivera: I would assume that it is a lot of corporate treasuries and probably some institutional investors as long as they have capital protection. Mostly treasuries I would assume.
IFR: Will this market dry up now given the recent market retreat?
Fernández: I don't think so. On the contrary, maybe people will be looking for more of these types of transactions. The market is still very limited in terms of tenors, but over the last year the market has continued to develop. It is tough to follow a market that is more private in nature. But we have seen a lot of corporates being more aggressive in this type of market and also more issuer clients that are starting to structure and buy these types of trades.
IFR: Is Mexico over-banked and are issuers benefiting or not?
Merino: Because we are in a very global environment, we do have too many banks, but they are mostly foreign banks. There are really few Mexican banks that can tackle the amount of money we have to raise.
Parra: From Su Casita's side, it is only over the past 12 months that banks have been willing to provide credit to companies like us. Beforehand, I don't know if it was because they didn't have time or they simply looked at us as competitors. But just 12 months ago, we got our first line of credit from a bank, and not only credit but also structured products, warehouse loans for MBS and construction loans. So we do see them as more aggressive.
IFR: Why do you think banks are lending to Sofoles now?
Parra: We are not that big of a company but we have grown over the past years. Now when we negotiate with banks we say, “if you have the balance sheet, and you want the investment banking business, then I want credit. If don't give me credit, I am not giving you the investment banking business.”
Fernández: I do think you have to separate the market. On the higher-tier names, it is clearly over-banked. It is good in a sense because there is competition and it makes banks become more aggressive and creative. But I think there are huge opportunities in the middle market segment. There are a lot of companies and clients that could be tapped. Obviously, banks such as Bancomer and Banamex have a national reach and are better positioned there.
But I think there is a very good opportunity for banks to get into that segment. Just as Jorge was saying, obviously companies like Su Casita have been very successful. Maybe you talked to four or five banks in the past and now you talk to 15 banks at least. That is more positive for the banks that have more access to these clients and for issuers who have more access to these banks.
Uribe-Caraza: There was a consolidation in the banking system very recently. Banamex and Bancomer now make up 60%–70% of the market. So it is good that you have other smaller banks getting into operations and also international banks getting into different niches in order to make the banking system more efficient.
Rivera: You are starting to see a much larger number of participants in the market. However, each one of those has certain niches in which they can invariably perform very well. The other thing is that this is because financing activity in Mexico has exploded over the past six or seven years.
With the last US recession in 2001, economic activity fell. But if there is a recession in the US again, probably the same thing will happen, but perhaps not as much, as we have seen a decoupling between the Mexican and US economy. A lot of banks are now coming to Mexico with the intention of staying. In the past, you used to see a lot of banks coming during the boom time and then leaving during the crisis.