Securitization: Fewer, larger issues keep Mexican ABS markets buoyant

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By:
Jason Mitchell
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Mexico’s capital markets have held up better following the US sub-prime crisis than experts expected, highlighted by recent issuances of record-size residential mortgage-backed securities.

On August 6, BBVA Bancomer placed Ps4.829 billion ($470 million) equivalent in UDI inflation-adjusted notes denominated 2033 RMBS, the largest MBS sale to date from Mexico. Recently, HSBC also announced it was preparing to sell between Ps1.5 billion and Ps2 billion in RMBS.

On August 14, Metrofinanciera announced plans to issue MBS valued at about Ps2.3 billion, made up of Ps1.6 billion equivalent in 2033 notes denominated in the UDI inflation-linked unit and Ps769 million in peso-denominated 2038 notes.

Furthermore, on August 21, Infonavit, a government-backed institution for social housing, announced that it planned to issue a record Ps4.84 billion RMBS during the next few months. In fact, on August 27, Infonavit issued its third UDI inflation-adjusted RMBS this year for Ps2 billion, which was oversubscribed by almost two times.

Juan De Mollein, managing director in structured finance at Standard & Poor’s, says: "RMBS issuance is showing a different trend this year from last: the issuance is less frequent but the sums involved are bigger. Overall, and including the big transactions in the pipeline, total issuance this year will be greater than last year."

Magda Guillen, structured product analyst for Latin America at Merrill Lynch, says: "The local Mexican ABS market has had a strong first half, despite the market’s proximity and exposure to the US economy. Issuance volumes are on par with those of the first half last year. RMBS – which typically accounts for about 40% of all local issuance – continues to be an important asset class in Mexico and was the largest single category of new issuance in the first half.

"The calendar for issuance in the early autumn is already crowding up, which may result in a more competitive environment for issuers."

She adds that only a couple of RMBS deals have been placed already, including the one by BBVA Bancomer, although several large transactions are in the pipeline. It remains to be seen if other issuers are capable of matching the relatively attractive pricing and investor interest levels observed in this transaction, she says.

According to Moody’s, Mexico had the strongest structured credit market in Latin America last year, with total issuance of the equivalent of $5.7 billion, accounting for 36.5% of all placements in the region, against Brazil’s 35% and Argentina’s 17.5%.

It reports that MBS transactions that closed last year increased substantially to $2.7 billion from $1.7 billion in 2006. Standard & Poor’s says that total issuance so far this year has amounted to the equivalent of $2.36 billion.

As well as repeat issuers such as Infonavit, Hipotecaria Su Casita, Metrofinanciera, Patrimonio, Crédito y Casa and GMAC, there were new participants in the MBS market last year, including HSBC, BBVA Bancomer and Hipotecaria Total.

Total issuance by Infonavit continued to be the largest in the MBS market, representing 12% of the total MBS transaction volume closed during the year. MBS issuance from the new participants, HSBC and BBVA Bancomer, accounted for another 13% of the total MBS transaction volume closed in 2007.

Window of opportunity

Carlos Benavides, a senior analyst at Moody’s, says: "During the first part of this year, we saw little RMBS activity in Mexico following the US sub-prime crisis, but now a window of opportunity seems to have emerged for new issuance. During this time, issuers have accumulated bigger loan portfolios and that might be behind the record-sized notes recently placed.

"Overall, performance of existing transactions has been in line with expectations. However, partly in response to the events in the US, mortgage originators are being a bit more cautious and are paying more attention to a potential client’s credit history."

He adds that the RMBSs being issued tend to have a new two-senior class structure, with class A taking precedence over class B and class A having a shorter tenor than class B. This structure has been set up to attract investors that prefer shorter-term transactions.

Merrill Lynch says that coupons for RMBS transactions in Mexico have widened in the past 12 months, increasing by an average of 55 basis points for both peso and UDI-denominated transactions above last year’s levels. It is difficult to predict when pricing levels will come back down to the low levels Mexico saw in previous years."

Guillen adds: "As in other markets throughout the world, the MBS market in Mexico is going back to basics, offering more conservative transaction structures with adequate structural features, such as reserve accounts and other credit enhancements, to provide additional security to note-holders."

The bias towards conservative structuring has served the Mexican market well, as most structured issuance has performed in line with expectations, and there has been no systematic deterioration in performance noted in any single asset category. Sub-prime lending has never taken off in the country.

A further tightening in lending standards by originators for individual borrowers is expected in the medium term, because of the higher funding costs facing banks and mortgage lenders. This should result in strong performance for new issuance backed by consumer assets in the future, provided Mexico’s macroeconomic environment continues to remain relatively stable.

Ernesto Gallardo, planning director at BBVA Bancomer, says: "Like other markets around the world, Mexico is suffering some contagion effect from what has happened in financial markets in the US and Europe. Markets have been so volatile and we have had to choose carefully when we attempt to issue an RMBS.

"There are only three institutions in Mexico, including BBVA Bancomer that have been able to securitize this year, while the number was much higher last year. Many issuers cannot afford the spreads – for our bank today spreads have increased by 60 basis points compared with last December but, for some other issuers, the rise has been much higher and prohibitive."

He adds that afores, Mexican pension funds, make up 70% of investors in RMBS in the country and that Mexico’s equivalent of Freddie Mac, the Sociedad Hipotecaria Federal (SHF), has helped shore up the RMBS market this year by purchasing about 20% of all issuance.

Fernando Perez, head of global markets at HSBC in Mexico, says: "The Mexican capital markets have been difficult recently but they are still active. We are still open for business.

"We are fine-tuning our placements and gauging investors’ appetite. Spreads on the senior tranche are up around 80 basis points on last December. HSBC started securitizing in Mexico last year and it wants to be a frequent issuer. This is an important part of a prudent risk-management strategy."