Mexico Lacks Investors For Sub-Sovereigns

While innovative structures are being used by sub-sovereigns in Mexico to support funding, work still needs to be done to attract a variety of investors, say panelists at the LatinFinance Infrastructure and Sub-Sovereign Finance in Mexico Summit. Sub-sovereign debt makes up 3.4% of GDP, compared to 1.7% in 2004, say bankers, but some investors are still reluctant to buy. “Structured finance products from states have very low participation from Afores or foreign investors, though government treasuries have increased their investments, as products are becoming more long-term,” says Dario Luna Pa, chief economist at the CNBV. Structures such as securitizing future flows of income from residential property titles can be very costly for the issuer, says Francisco Gonzalez, director of planning and public funding at State of Mexico, which did the first such deal last month. However, states should be encouraged by the fact that there has been an increase in appetite from local banks for sub-sovereign risk in the past year, according to Gerardo Salazar of Banco Interacciones. “These are good credits, we are buying their paper and we are very positive about them,” he adds. Nonetheless, 60 of the last 75 ratings actions taken on sub-sovereign have been downgrades, meaning some investors will not participate, says Salazar. Gonzalez says states must be transparent and accommodate the needs of the market, and also take actions necessary to maintain ratings so as to attract as many types of investors as possible. “The State of Mexico has had 7 ratings upgrades since this administration came in. Sure, it was from a low base, but this helped when we bought our deal that securitized future income flows from residential property titles to the market,” he adds.