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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 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 (Investment Groups Specializing in Retirement Plans) have amassed US$ 50 billion dollars since their inception in 1997, and homegrown mutual funds are not far behind. Insurance companies have growing pools of capital, and just in the 14 months ending in July, foreigners 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 (BMV) 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 medium-sized businesses will soon be eligible to improve the debt-to-equity ratio on their balance sheets with an initial public offering on the BMV.

One of the most exciting hot spots is real estate. On the commercial side, shopping centers, 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"--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 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 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 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 ways to circumvent the tortuous 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.

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

Carlos Salazar, subdirector of Corporate Strategy at the BMV, said he's optimistic 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
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.
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Title Annotation:DOING BUSINESS
Author:Emmond, Kenneth
Publication:Business Mexico
Geographic Code:1MEX
Date:Sep 1, 2005
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