Crying out for corporate funding

For Mexican corporate treasurers it is, one might say, the best of times and the worst of times. Good times because the core businesses of most leading Mexican firms are doing remarkably well. The financial crisis of 1994-95 when the currency fell over 60% and GDP contracted by over 5% is being left behind by most businesses. The economy grew 5.4% in the first half of 1998, and with a few notable exceptions, leading corporates have reported healthy first- and second-quarter results.

Tough times because despite the underlying strength of their companies, financial management is finding it increasingly difficult to fund growth. Like other emerging market firms, Mexican corporates have all but given up on raising funds on international markets as fallout from Asia and east Europe sends bond and commercial paper investors running for cover.

Small loans to safe borrowers

At home, a beleaguered banking system - one of the most notable sectors not to have shaken off its tequila-crisis hangover - is only able to provide limited funding to the lowest-risk clients. Since the Mexican government decided to reprivatize the country's banks in the early 1990s, the banking system has been in an almost constant state of flux. The Salinas government's privatization insisted on Mexican ownership, and meant that few of the new owners had any real banking experience. That, and a sprint to build market share with easy loans meant Mexican banking was in a shaky position even before the late 1994 currency collapse and consequent financial crisis.

"The banking crisis could be seen coming even without the devaluation of 1994," the president of Mexico's securities commission, the Comisión Nacional Bancaria y de Valores (CNBV), Eduardo Fernández García, said in a recent interview. "From the second half of 1994, it was evident that some banks were already facing severe problems, including difficulties in renewing market obligations."

But the collapse of the peso in December 1994 made things really difficult for the banks. The government has since poured around $65 billion (about 14% of GDP) into a complex rescue scheme, and the CNBV has intervened in the management of 13 banks and overseen the forced or free sale of several institutions. Many more banks have sought new capital partners, and that has involved heavy foreign investment. Five of Mexico's six largest banks now have foreign partners, leaving only market leader Banamex fully in Mexican hands.

Among the investing banks are the Canadians, Bank of Montreal and ScotiaBank, the UK's HSBC, Spain's Santander, BBV and Banco Central Hispano and Portugal's BCP. Citibank has bought into the troubled Confía banking group. But in the second tier of the market, several mid-size Mexican banks have yet to seek or find new capital partners, domestic or foreign. Many analysts consider their position shaky. Even more so after the CNBV put several banks on a watchlist for low capitalization. Those banks are seen by analysts as vulnerable unless they merge with another institution or find a well-capitalized investor.

"First of all, there are too many banks," says Santander Investment banking analyst Patrick Boucher. "The process of consolidation is not over."

Nonetheless, many Mexican chief financial officers at leading firms argue that the problems being faced by the banking system are more of a distraction than a handicap to their companies. They argue the leading banks are in good shape, and that the storm over the future over the government's bail-out vehicle, the Fondo Bancario de Protección al Ahorro (Fobaproa) is more political than economic.

"I think the government will do whatever to ensure the viability of the financial system," says Felipe Canales, chief financial officer of Monterrey-based conglomerate Grupo Alfa. "Fobaproa has become more political than economic. The risks of Fobaproa are the political implications, I do not see the economic risks as that significant."

Fobaproa took over the banks worst hit by the 1994-95 crisis and provided additional capital to many more, at an estimated cost of $65 billion. The country's congress is still debating the transfer of Fobaproa's debt to the federal treasury - somewhat of a moot point for country-credit analysts who have long treated Fobaproa's assets this way.

"We've always treated Fobaproa as public debt," said Standard & Poor's managing director for Latin American ratings Victor Manuel Herrera. "Maybe the legalities are complex, but this is nothing new in Mexico."

But few deny the continued low supply of bank credit and the problems faces by the system are worrying. The largest firms acknowledge that having put their own funding house in order may prove small compensation if a shortage of credit available to their customers and suppliers halts their growth.

"The impact is indirect through our customers and suppliers," says Ignacio Toussaint, chief financial officer at Mexico's second-largest retail conglomerate, Grupo Gigante. "If they can't fund purchases or reinvest in their businesses they won't grow with us. Just because we can get loans does not mean that they can."

At even the biggest corporates many funding decisions are on hold. Standard & Poor's rated 19 Mexican cross-border issues last year, virtually all before Hong Kong hit the headlines in October. In the first eight months of this year only five such issues have been completed. The agency has rated two other companies, diversified conglomerate Industrias Unidas and Pliana Holdings, but these transactions have been postponed. And it is not just debt transactions that are being delayed. At least nine currently private Mexican firms, including provincial supermarket chain Chedraui and sugar producer Consorcio Azucarero Escorpión, are awaiting better market conditions to launch IPOs.

Many corporate treasurers thus find themselves in a holding pattern. The Mexican banking system may meet their short-term needs, but more ambitious longer-term funding must wait until market confidence has returned. One such case is Alfa. The company completed a $300 million Eurobond issue in September last year for its steel-making division, Hylsamex. The company secured 10-year funding at a rate of 3.25% over US treasuries. The issue was placed just weeks before Hong Kong sent Asia's financial difficulties into the headlines.