Mexico's local bond market has seen a revival in activity after a brief lull in July driven by the uncertainty surrounding this year's presidential elections. Volumes have been robust with about Ps93bn (US$8.6bn) of long-term debt being issued in the domestic markets so far this year, and some bankers reckon the market could see another Ps20bn in supply before the year ends.
But this year's final figure is likely to fall short of the Ps136.595bn and Ps140.029bn seen respectively in 2005 and 2004. Lower volumes are partly the result of pre-funding done in preparation for any worst-case scenarios that might have occurred post election, but also because extremely liquid bank markets have lured corporates away from bonds with competitive rates and attractive structures.
Still, the approximately Ps49.59bn in corporate debt maturing next year bodes well for an uptick in new issuance in 2007. Liquidity also abounds on the bond side, as local institutional investors such as mutual and pension funds (Afores) grow at a torrid pace. Afores, however, have been constrained by investment limits and have tended to stick to government securities and blue chips. It is hoped that such restraints will be loosened going forward.
Hopes are that a high-yield market will eventually emerge in Mexico to broaden the market, but that scenario seems unlikely, at least in the short term. While a small group of Single A and Triple B credits have tapped, the cost of public disclosure continues to discourage lower-grade borrowers from stepping forth.
The relatively small size of such deals also dampens enthusiasm among institutional investors who have considerable sums of money to put to work.
For now, growth will be driven by asset-backed transactions, which are gradually over taking plain vanilla transaction as the dominant financing vehicle. Indeed, most of September and October's issuance has comprised MBS deals from mortgage lenders and GMAC.
Meanwhile, the government has been doing its part to develop the local market. In late October, the government inaugurated its first 30-year fixed-rate peso-denominated issue amidst much fanfare. It raised an initial Ps2bn and priced 3bp inside the 20-year as demand reached Ps12.59bn.
While the 30-year sends a positive message and may encourage some blue chips to venture further up the yield curve, bankers think the impact on corporate issuance will be limited. Part of the problem has been lack of liquidity and the exclusive participation of domestic investors in the corporate sector. While foreign accounts have been keen buyers of government securities, they have stayed clear of corporates.
That stalemate has been broken by innovative Global peso deals, such as the Ps5bn 2016 issued by wireless heavyweight America Movil last year. These SEC registered transactions are designed to lure international accounts, widen the investor base and creating pricing tension between locals and foreigners. But withholding tax remains a major impediment to further development. It is hoped that the new administration will come to the rescue and manage to get some sort of tax relief through Congress in the next year or so.