This year has proved an aggressive one for Mexican corporate bonds, which are benefiting from the growth of private pension investment companies. Monica Campbell reports.

Last year corporate bond activity in Mexico rose 50% from a year earlier to reach nearly $4.4bn. This year it looks even hotter, with estimates of up to $5bn, compared with 1998 when the total value of all such issues in Mexico did not even reach $1bn.

More and more, Mexico’s corporate bond market is looking positively bouncy as local companies – whose confidence is fed by an economy that has weathered bad times in the US and Latin America – are proving increasingly capable of raising cash in ways that do not involve banks.

Most deals pair issuers with investors from Mexico’s cash-rich pension funds, many of which are hungry for investment alternatives. No doubt, the local corporate bond market is still petite when compared with those in New York or London, but there is a strong reason to believe that, in time, it will become a more popular bet.

So far, it has proved an aggressive year for Mexican corporate bonds. In January, while many companies sat tight waiting to see how the US-led war in Iraq would play out, two Mexican firms decided to hit the markets with hefty bond issues.

First came América Móvil, a local telecommunications giant, which offered $94m in a three-year issue, then Gemec, a financial services firm, with a $600m issue. Vitro, a local glassmaker, and Grupo Carso, an industrial giant, also rolled out bond deals.

Then, in April, Mexico’s Coca-Cola Femsa issued about $408m in peso-denominated debt, partly to finance the recent $2.7bn purchase of its regional counterpart, Panamerican Beverages. Coca-Cola Femsa plans an additional issuance of $500m this year.

Total corporate bond issuances this year should come to $5bn, according to JP Morgan, the US investment bank that has brought some of Mexico’s biggest corporate bond deals to market. The total is notable in Mexico, where financing remains scant and is typically reserved for blue-chip companies.

“There’s an amazing amount of demand and it’s mostly due to growth in mutual funds, along with pension funds and insurers,” says Jorge Alonso, head of JP Morgan’s credit and rates division in Mexico.

The steady growth of Mexico’s private pension investment companies has provided the biggest boost to corporate bonds. In 1997, the government allowed for the creation of privately-managed pension funds, with the eventual aim of scrapping the struggling state-run system.

Pension fund liquidity

Since then, the funds have reaped large amounts of liquidity. That is because the average age in Mexico is 27, which is a blessing for any pension system because deposits from younger workers pile up while the system is less drained by pensioners. Today, an estimated 26 million Mexicans have private accounts, and the value of their portfolios is increasing by about $500m a month.

Mexican pension funds also enjoy more investment freedom. The systems regulator, Consar, has lifted restrictions on peso debt holdings and it now lets funds buy into lower-rated corporates. Local funds’ alliances with foreign partners such as MetLife International, Prudential Financial (both US) and Spain’s Santander Central Hispano have also helped.

Now, Mexican pension funds manage about $33bn (5% of the country’s gross domestic product), compared with about 0.4% in 1997. Most analysts expect the funds’ portfolio to double in size by 2010.

One local pension-fund administrator, Actinver, has about $825m available to invest in the domestic market. “Most of our money still goes to government paper but the Femsa deal is one example of how far the corporate bond market has come,” says Rogelio Gallegos, fund manager at Actinver. “You still don’t get large deals like this every quarter though. We’re still talking about a lot of small offerings.

“But the market is developing nicely, with companies taking advantage of lower interest rates to refinance their debt.”

Tactical tool

Aside from raising money at a lower cost, many corporate bond issuers are seeking to finance activity that will help them to grow or retain their leading positions in the local market.

Ford Credit de México, a local unit of Ford Credit International and an active issuer, raised about $350m in peso-denominated bonds last year so it could offer its customers cheaper car loans.

“The market for these bonds is still young and sensitive, so we try to offer a variety of issuances with different rates and terms of time,” says Adolfo Monroy, treasurer at Ford Credit de México.

Coca-Cola Femsa’s bond deal helped it to lock up its stance as Latin America’s biggest Coca-Cola dealer, with a riskier financing route. “Given that we issued peso-denominated bonds on the Mexican securities market, we have the opportunity with this debt to end up with a 50-50 mix of dollars and pesos, which reduces the risk that we would originally have had in this transaction,” Carlos Salazar, head of Coca-Cola Femsa, recently told local reporters.

The money raised from Femsa’s bond deal will go towards its investments in systems and marketing to increase volume growth and market share.

Mortgage and housing companies are also active issuers. Su Casita, a Mexican builder and mortgage lender, has issued $93m in bonds to help finance 63,000 mortgages at competitive rates. This year Su Casita is issuing $60m in three-year bonds. “Our idea is to visit the market every six months,” says Manuel Campos, vice-president of Su Casita.

First-timers to Mexico’s corporate bond market this year are likely to include Grupo Posadas, a hotel operator, and Infonavit, a national housing fund. Frequent issuers such as construction company Frisa, Volkswagen de México, the local unit of the German carmaker, and Cementos Mexicanos, the cement giant, are also expected to visit the market.

However, not all is seamless with Mexican corporate bonds. For the most part, they are still off limits to small and medium-sized companies, which lack the positive ratings of large companies. This leaves many firms at the mercy of commercial banks.

Issues are also relatively short-term and tend to carry wide spreads. The recent América Móvil deal, for example, was set at 120 basis points (bps) above the interest rate available on government bonds (known as Cetes).

Tough precedent

Demand for América Móvil issue was strong – most of its bonds were snapped up by mutual funds – but the deal set a tough precedent for other issuers, particularly at a time when the peso was losing value to the dollar.

Corporate issuers still compete heavily with sovereign debt deals, which are seen as less risky. “Our market share is still small and, like all over the world, it’s still wait-and-see,” says Mr Gallegos. “A lot of investors would rather wait a few more months and not pay the price for coming in so fast. The safer route is still government securities.”

Yet the investor base is growing at a faster rate than the supply of government securities. And corporate bonds are also more attractive since a reform was implemented this year that dropped the withholding tax to 50bps from 240 bps, placing corporate debt on par with government paper.

This leaves it up to companies such as Su Casita to court private investors directly, to lure interest to their debt. “Buying corporate debt can be a bit tougher because it requires a more intense level of study and familiarity with the local market. But I’m encouraged by investors, some coming from the US, who are interested in local debt and have clearly done their homework,” says Mr Gallegos.

Mr Alonso of JP Morgan agrees but he still sees the secondary market as a “limited” one, with most investors mainly interested in the high-grade market only.

Long-term outlook

Looking ahead, Mexico corporate-bond business should continue to thrive. Yet the market still depends on the outlook for the US and Mexican economies.

Although Mexico is battling the adverse international climate better than its Latin American counterparts, the economy is far from thriving. Recently, the central bank lowered its growth estimate for 2003 gross domestic product to 2.4% from 3% because of the economic impact of the war in Iraq.

Nevertheless, the strengthening stance of the local corporate bond market reflects a positive change in Mexico’s financial system.

Most bankers expect that, over time, the market will be helped by the offering of a wider array of instruments for tapping the market and to cover any associated risk. Products like credit enhancements, total return swaps, mortgage-backed securities and credit-linked notes are the type of investment alternatives that some investors have in mind.

“These options should come about over the next three years or so but, until then, the market is still a bit limited and leaves people a unsure of where and how to invest,” says Mr Gallegos.


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