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Re-inventing Mexico's financial marketplace: the decade-long credit drought is fast drawing to a close.



After 10 years of hunkering down Hunkering down

A term used to describe a trader selling off a big position in a stock.
 and regrouping, the nation's banks have started to increase the size of their credit portfolios.

Even more significant is the growing variety of specialized institutions and financial instruments that have become available for firms seeking to grow or improve their capital structure.

Liquidity is increasing rapidly: the Siefore retirement savings plans Noun 1. retirement savings plan - a plan for setting aside money to be spent after retirement
pension account, pension plan, retirement account, retirement plan, retirement program, retirement savings account
 (Investment Groups Specializing in Retirement Plans) have amassed US$ 50 billion dollars since their inception in 1997, and homegrown home·grown  
adj.
1. Raised or grown at home.

2. Originating in or characteristic of a locality: "Rock is homegrown music in the United States, evolved from blues and country and Tin Pan Alley" 
 mutual funds are not far behind. Insurance companies have growing pools of capital, and just in the 14 months ending in July, foreigners Foreigners

alienage

the condition of being an alien.

androlepsy

Law. the seizure of foreign subjects to enforce a claim for justice or other right against their nation.

gypsyologist, gipsyologist

Rare.
 taking advantage of Mexico's economic stability and higher yields bought more than US$ 7 billion of peso-denominated bonds.

Venture capital and private equity firms have sprung up and sale-leaseback operations have been established. Meanwhile, the Mexican Stock Exchange Mexican Stock Exchange

The only stock exchange in Mexico. The Indice de Precios y Cotizaciones, or IPC index, consists of the 35 most representative stocks chosen every two months.
 (BMV BMV Bolsa Mexicana de Valores
BMV Bureau of Motor Vehicles
BMV Bundesministerium für Verkehr (German: Federal Ministry of Transport)
BMV Below Market Value
BMV Brome Mosaic Virus
BMV Bedside Medication Verification
) is poised to launch a new initiative aimed at attracting more stock listings once the Securities Markets Law is proclaimed, perhaps as early as this fall.

Despite all of this innovation, the financial community has not been trying to re-invent the wheel. Instead, it's adapting instruments that were developed elsewhere to Mexico's business culture and regulatory environment. The result: a broadening financial market on the supply side.

The demand side of the market is growing as well.

Small business in Mexico has a longstanding pent-up demand for funds, having looked in vain for many years for financial support. Credit cards purchases are a fast-growing segment of the consumer market. Lots of undercapitalized Undercapitalized

A business has insufficient capital to carry out its normal functions.


undercapitalized

Of, relating to, or being a firm that has insufficient long-term equity to support its assets.
 medium-sized businesses will soon be eligible to improve the debt-to-equity ratio debt-to-equity ratio

The relationship between long-term funds provided by creditors and funds provided by owners. A firm's debt-to-equity ratio is calculated by dividing long-term debt by owners' equity. Both items are shown on the balance sheet.
 on their balance sheets with an initial public offering on the BMV.

One of the most exciting hot spots hot spots

acute moist dermatitis.
 is real estate. On the commercial side, shopping centers shopping center, a concentration of retail, service, and entertainment enterprises designed to serve the surrounding region. The modern shopping center differs from its antecedents—bazaars and marketplaces—in that the shops are usually amalgamated into , tourist centers, warehouses and office buildings are being developed all over the nation. In the residential segment, new housing is going up at a pace not seen in many years.

That's all well and good, but how can all this demand for credit, where a large proportion of the clientele ranges from medium-sized to small to tiny, connect with the big investors, who tend to avoid investments of less than a few million dollars?

Since 1999 the macro-lenders have been meeting the micro-borrowers through a concept called "securitization Securitization

The process of creating a financial instrument by combining other financial assets and then marketing them to investors.

Notes:
Mortgage backed securities are a perfect example of securitization.

May also be spelled as "securitisation.
"--that is, bundling groups of small loans or mortgages and selling them as a single package at a discount based on present value and the level of risk. The size of the discount is what's negotiated between buyer and seller.

The seller, who might be a bank or other credit institution with many small borrowers, offers a package of mortgages, car loans, consumer loans or even credit card loans. The buyer, who wants a package that reflects his expertise, size, and propensity for risk-taking, administers the loans or hires someone else to do so.

Though relatively new to the Mexican marketplace, securitization has been a mainstay in the U.S. financial markets since the 1970s. At present about US$ 6.6 trillion dollars of loans are in securitized securitized

Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds.
 packages.

Through securitizing, the seller can recover his working capital quickly and then recycle it to issue new loans in his marketplace of small borrowers. This is how institutions that are not normally interested in the little guy are helping to make more credit available to him, through the liquidity he injects into the market by buying the securitized packages.

Nowhere is there more interest in this type of vehicle than in real estate.

The big player

Standard & Poor's (S & P), the debt rating agency, estimates that in the first five months of this year alone, US$ 2.3 billion dollars worth of securitized debt was issued in Mexico, a 114 percent increase over 2004.

Guillermo Valle, an S & P analyst, said to BUSINESS MEXICO the biggest securitizers are firms offering residential mortgages, bridge financing Bridge Financing

A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations.

Notes:
These funds are usually supplied by the investment bank underwriting the new issue.
 for construction projects and municipal issues. More than half of all securitized loans in 2004 involved the real estate sector--either directly through home mortgages or financing for commercial real estate projects, or indirectly through construction bridge loans. To date, Financial Entities with Limited Object (Sociedades Financieras de Objeto Limitado, or Sofoles) and the National Fund for Housing for Workers (Infonavit) have been major mortgage issuers.

Valle predicted that this market will continue to grow. He said the real estate sector has the potential to remain the most important player in the securitization market, at least in the short term. He expects many new emissions to come from Sofoles.

For Sofoles, the "limited object" part of the title says it all. By definition, they are niche market A niche market also known as a target market is a focused, targetable portion (subset) of a market sector.

By definition, then, a business that focuses on a niche market is addressing a need for a product or service that is not being addressed by mainstream providers.
 lenders. Each must declare at the time of its inception which sector it chooses to target for its lending activities. It might be automotive, agroindustry, manufacturing or warehousing, for example. There's even a Sofol that specializes in lending to other Sofoles.

The first Sofoles were created in 1994, when lenders were looking for Looking for

In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with.
 ways to circumvent the tortuous tor·tu·ous
adj.
Having many turns; winding or twisting.


tortuous adjective Referring to complexly twisted thing. Cf Tortious.
 and costly regulatory environment encountered by the banks.

Today, the big boys among the Sofoles are those specializing in mortgage lending. They have become so attractive as a lending tool that in recent years even the banks have been buying them, because their flexibility allows them to lend more profitably and at lower rates than the banks can.

Like many other lenders, Sofoles like the idea of increasing turnover by securitizing their loans, more than ever now that residential construction is booming.

The newest financial instruments of all on the Mexican market are expected to become a major fixture in years to come.

They are called Fideicomisos Inmobilarios de Bienes Raices, or Fibras. They are similar but not identical to the Real Estate Investment Trusts (REITs) that have been around for about 30 years in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. .

Fibras are designed to create a marketplace for commercial real estate developments but they can be applied to infrastructure projects as well. Each must be structured individually to meet the needs of the sellers and the investment goals of the buyers.

A Fibra project might be an office building, commercial center or industrial park, but there is also room for creative variations. For example, Femsa, the big beverage company, wants to increase its working capital by offering the land on which its plants are located as a Fibra-based sale-leaseback operation.

One of the biggest regulatory hurdles to overcome is avoidance of double taxation. Under Mexican law, each real estate transaction is subject to a transfer tax of 10 to 15 percent. If a company sells its property to a Fibra trust, and then the trust sells to the buyer or buyers, it runs the risk of being subject to double taxation if it is not appropriately structured.

At present the BMV is working with three potential vendors to structure the first packages to be offered on the market.

Some Fibras will be sold directly to large investors like domestic or foreign pension funds or insurance companies, while others will be sold in units, so that a small investor Small investor

An individual person investing in small quantities of stock or bonds. This group of investors makes up a minimal fraction of total stock ownership.


small investor 
 with, say, 100,000 pesos, can buy part of a large package.

Carlos Salazar Carlos Salazar is the name of the following individuals:
  • Carlos Salazar Castro (1800-67), chief of state of El Salvador and Guatemala
  • Carlos Salazar (1933- ), Filipino actor
  • Carlos Salazar (1964- ), Argentine boxer
  • Carlos Salazar, Colombian painter
, subdirector of Corporate Strategy at the BMV, said he's optimistic op·ti·mist  
n.
1. One who usually expects a favorable outcome.

2. A believer in philosophical optimism.



op
 that the first Fibras will be ready to make a public offering before the end of this year.

Finding funding is a lot more complicated today than it was in the heyday of easy money in the 1980s and 90s, but there's a much wider variety of funding--and investing--possibilities, and a much better chance that both lender and borrower will be satisfied with the outcome.

Kenneth Emmond is an economist and journalist who has lived and worked in Mexico since 1995. He can be reached at kemmond00@yahoo.com.
Mexican Securitizations in 2004

One cross-border public debt issuance         3%
Banorte-IPAB promissory note securitization  41%
6 structured bank loan transactions          36%
26 local public debt issuances               19%

Source: Standard & Poor's

Note: Table made from pie chart.
COPYRIGHT 2005 American Chamber of Commerce of Mexico A.C.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2005, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:DOING BUSINESS
Author:Emmond, Kenneth
Publication:Business Mexico
Geographic Code:1MEX
Date:Sep 1, 2005
Words:1319
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