Category: Mexico

US government participation in Citi is unlikely to trigger an immediate sale of Banamex, but under Mexican law the finance ministry will decide, say local attorneys. Participation in the capital stock of a Mexican bank by a foreign government could force divestment, says Rodrigo Conesa Labastida, partner at Ritch Mueller in Mexico City. “The ministry of finance may order the sale of the shares owned by the government to the Mexican bank,” says Conesa. He adds that the price would be 50% of the lowest of either book value or market value of the shares. “Proceeds from the sale would be kept by the Mexican government as a fine,” says the lawyer. However, he adds that this will likely not happen. “In practice this is not possible because the participation of the US Treasury in the capital stock of Banamex is indirect, so the ministry of finance cannot order the sale of the shares,” says Conesa. “Revoking the banking license is a theoretical possibility, in practice this will never happen,” he adds. The government is therefore challenged with interpreting the banking law in the light of the current crisis. “I don’t think [the US government stake] will trigger, from a legal point of view, that Banamex should be sold,” says Rafael Robles, a partner at Galicia y Robles, noting that if the US government equity is only supporting the bank, it may not be found to violate the law. Even if there is no legal imperative, political pressure may become too great. Banamex is a sensitive case, as an iconic institution that has for many years been a leading domestic bank. It operates 19% of the Mexican system, according to Moody’s. Talk of local groups forming to buy Banamex continue to do the rounds. Itau is also mentioned as a potential bidder if Citi opts to sell.

S&P has lowered the credit rating of Mexican mortgage lender Su Casita to BB- from BB, and its national scale mark to A minus from A. “The downgrade reflects the continuing deterioration in Su Casita’s asset quality, negative pressures on its profitability and low levels of capitalization,” the agency says. Particularly troublesome is the rate of non-performing assets in the lender’s portfolio, which S&P estimates final 2008 results will show to be more than the 5.4% seen in September. Despite the recent MXP500m raised from existing shareholders, S&P still finds Su Casita’s Capitalization to be low. The outlook is stable.

Mexico’s Megacable is in a good position to acquire competitors, say analysts eyeing the credit. “Megacable has the flexibility to acquire assets in its sector in accordance with its consolidation strategy,” according to Banif Ixe, pointing to net debt reduction of 35% in the past year, with a leverage ratio of 0.5x and interest coverage ratio of 14.6x. The cable company’s shopping spree over the past 2 years includes 11 purchases of smaller local competitors. With a 31% share of the Mexican paid subscriber market, Megacable is the country’s largest operator, but still holds a relatively small portion of the national market. Among larger independent companies in Mexico are privately held Grupo Hevi, which has 600,000 subscribers, and Cablecom, with 300,000, notes Rajneesh Jhawar, media and telecom analyst at JPMorgan. “These companies are highly levered,” he adds, referring to Mexican cable companies in general. “Having this debt during a downturn makes them more susceptible to considering an equity investment or acquisition,” he adds. Historically, Telmex, one of the region’s biggest telecom acquirers, has paid between $1,000-$1,200 per subscriber, though since its last spree, public equity valuations have tumbled by some 50%, says Jhawar. As such, a company like Grupo Hevi might command an equity price tag of anywhere from $300m to $600m.

Volkswgen Leasing has begun its weekly commercial paper auctions, pricing MXP300m in 28-day notes at 8.76%. Demand reached MXP700m, says a banker on the sale. The banker says the issuer may increase the tenor or size of the sales, slated to happen on a a weekly basis for an undetermined period of time. The issue follows retailer Liverpool’s pricing last week of MXP700m in 1-year commercial paper at the TIIE plus 150bp and BNP Personal finance’s placement of MXP1.4bn in weekly issues in different maturities of up to one year. Santander managed the VW sale.

The sliding price of copper is making production unaffordable for some Mexican producers, and this may result in the least efficient ones being acquired by stronger competitors, says Rodrigo Heredia, mining analyst at Mexico’s Ixe Grupo Financiero. Heredia forecasts that in 2009 and 2010, the price per pound of copper will be $1.74-$2.18. Although this represents a rebound from $1.45 February 23, it is still close to making production unprofitable. The price of producing a pound of copper, Heredia says, is around $1.20 for the most efficient Mexican companies and $2.20 for the least efficient ones. This may cause the least efficient producers to seek a buyer as they will not be able to compete. And since valuations are so low, potential buyers will be able to pick up assets for bargain prices. “The drop in the price of copper has caused the valuation of companies to drop an average of 62% in the past year. In addition, many of these companies have a lot of debt and need to sell assets to pay down that debt,” Heredia explains, adding that there are also other producers that, although not heavily in debt, are not generating any income because they can’t afford to produce copper. Potential buyers, he says, will be efficient producers with strong balance sheets and, in most cases, no need for financing.

Goldman Sachs Infrastructure Partners remains bullish in its long term view of Mexico, despite the effects of the current crisis, and that banks have yet to take out the MXP32bn 7-year financing for its MXP44bn Farac road concession it won in 2007 with builder ICA. “On a risk-adjusted basis, given the nature of the contract we have, we’re happy with the returns,” Jonathan Hunt, VP in Goldman Sachs’ Infrastructure investment group, says, noting especially the quality of local investors and of interaction with local policy makers, compared to other markets. “We took a view that that market [Afores and other institutional investors] would be there until refinancing, and we have enough term on our loan that we think that is going to happen,” Hunt says of the Farac takeout. Ideally it would be done locally, he says, but Goldman is prepared to look everywhere. “I think [the loan holders] appreciate that we’re incredibly focused on refinancing in a reasonable timeframe. This will be done over time, and we will be opportunistic,” he adds. Hunt says he believes Farac could be replicated in the future, if not necessarily under current market conditions, as the assets will remain attractive to the local markets. Hunt emphasizes that Goldman is in Mexico, which it prefers to some other EM, for the long term. “In order to be an investor in Mexico, one must have a long term view.

Pemex and Comision Federal de Electricidad (CFE) are two quasi-sovereigns that could access the Mexican local bond market this year and help open the door for corporates. “You have an issue of confidence that needs to be broken by good names accessing the market,” says Gerardo Rodriguez, deputy undersecretary of public credit at Mexico’s finance ministry. The official says Hacienda is working with quasi-sovereigns such as Pemex and CFE to help prize open traumatized credit markets. Such issuers could get a 10-year tenor in the local market, says Rodriguez, who concedes that they may have to look at 3-5 years at first. Pemex CFO Mauricio Alazraki says the state-owned oil company is considering a local markets issue this year, though he declines to state at what tenor or price. Mexican issuers and investors have different views on where new issue pricing should be this year, amid volatility and uncertainty about the overall economy. “To be successful now, you have to be generous on pricing to get the volume,” says a Mexican DCM banker. Rodriguez says he hopes other corporates will follow once benchmarks are set by a top quasi-sovereign, provided they accept the new pricing reality. This would return confidence to the markets, resulting in more issuance, perhaps as soon as Q2. He was speaking at last week’s LatinFinance Cumbre Financiera Mexicana in Mexico City.

Banxico has cut the monetary policy rate by 25bp to 7.50%. The sharp fall in demand and in US employment is negatively impacting economic activity in Mexico, the bank says, adding that inflation has been dropping since January. The consensus was for a 50bp cut. “On the one hand, virtually all economic indicators show that the economic downturn in Mexico has deepened in late 2008 and early 2009, which would justify, in theory, an aggressive rate cut,” says Credit Suisse, which correctly predicted the quarter point reduction. “On the other hand, however, the Mexican peso has continued to weaken against the US dollar to near record lows, increasing the danger that part of this weakness will show up in inflation,” the shop adds. UBS Pactual, which also forecast a 25bp drop, says the central bank is now more focused on the value of MXP relative to USD, on the assumption that a larger interest rate cut will put the peso under pressure.

Multilaterals need to show more flexibility and creativity in aiding Mexico and other countries through the crisis, says Gerardo Rodriguez, deputy undersecretary for public credit at Mexico’s finance ministry. “They could do a lot more,” the official says. “These institutions need to prove their worth in current times: supporting sovereigns, supporting financing packages. When you look at the different initiatives in some of the developed markets, we have not seen anything from multilaterals to take them out of their regular lending programs in the order that the current situation requires,” says the official. He adds that there are a number of products that the government has been trying to engage the multilaterals in on a bilateral basis. Ellis Juan, the IDB’s Mexico representative, agrees that more needs to be done, noting the unprecedented scale and speed of the crisis has complicated multilaterals’ response. They were speaking on a panel at last week’s LatinFinance Cumbre Financiera Mexicana event in Mexico City.

The fundamentals of the Mexican economy are strong, according to a Pimco executive, though the country and other EM economies will be competing with US high yield corporates for investor cash. “Fundamentally, the Mexican economy is in much better shape than other emerging economies,” says Lupin Rahman, vice president of EM portfolio management at Pimco, speaking on a panel at LatinFinance’s Cumbre Financiera Mexicana. “Looking at the EM space, Mexico is definitely a country that most investors would feel comfortable in, as it has great fundamentals versus the rest of the EM space,” she says. For non-dedicated investors, however, making the case for Mexico is much more difficult, especially in a risk-averse environment, she adds. Providing competitive returns versus known US names will be a challenge for all of the emerging markets, according to Rahman. The manager declines to indicate how Pimco is positioned in Mexico, or what sectors might be the most compelling. Looking ahead, Rahman says she believes the full deleveraging process for EM corporates and investors is a question of several quarters, if not years. “I can’t say I see a strong recovery in 2009,” says the investor, noting that the rebound in Mexico or emerging markets is a matter of resolving core economic problems in developed markets. In December, Pimco had up to $45bn allocated to LatAm, including local markets, from a portfolio worth over $800bn.