Category: Regions

With retail borrowers well-supported by government institutions, the lower-income section of the Mexican housing market should become more competitive in the economic downturn, Carlos Moctezuma, CFO of Homex, tells LatinFinance. Most of the homebuilder’s sales are to the low-to-middle income segment of the market, where SHF, Infonavit and Fovissste provide mortgage assistance to buyers. While S&P says concentration of mortgage origination at public housing agencies will increase vulnerability to political risk, Moctezuma says this segment will be much better protected during the downturn. Competitors with greater exposure to higher-income segments may turn to focus on the lower-income buyers, he explains, thereby increasing competition. There is also opportunity for Homex and its large rivals to take market share away from much smaller competitors, who may suffer limited access to financing. “I don’t see major players involved in M&A activity, but I do see a focus on gaining market share this year,” Moctezuma says. As long as GDP growth does not fall exceptionally and indicators like employment and consumer confidence remain stable, there should be enough customers for all players in the low-income housing market, which Moctezuma says represents 80%-90% of the available mortgages in Mexico. He adds that Homex – which last visited the DCM in 2005 – has no borrowing plans this year, with short-term credit lines in place for working capital needs.

The currencies of Mexico and Colombia have slid since the start of the year, affected by risk aversion and the global economic slowdown, but they are expected to strengthen by the end of the year. “There is a considerable amount of risk aversion, so the depreciation is not due to speculation. People are buying dollars to avoid risk,” says Doug Smith, chief economist for the Americas at StanChart. Ociel Hernandez, an analyst at Bancomer agrees, adding that the MXP’s fair actual value would be 12.50-13.50 per dollar. The COP, says Smith, has suffered due to a drop in export activity in the country, especially to Venezuela, one of its major trading partners. That is in addition to the flight to quality which is also affecting MXP. Since January 1, the MXP has gone to 14.59 from 13.77 per dollar. The COP has flared to 2,538 from 2,244 in the same period. Hernandez says he expects MXP to fluctuate between 13.80-14.50 during the first half of 2009 and between 13.30-14.00 in the second half. StanChart expects the COP to trade at 2,100 by the end of the first half of 2009 and 1,950 by the end of the year.

International energy companies involved in oil exploration and production have been taking a look at Mexico since an energy reform that allows Pemex more flexibility to subcontract private companies was approved, says Gilberto Escobedo, a partner at boutique Sedna-Serficor in Mexico. “There are smaller exploration and production companies here in Mexico that could be acquired by some of the larger players from Norway, the US and Spain,” he says. Locals may not have the financial capacity to offer services to Pemex, but if they joined a larger international player they would be able to do so, he says, adding that international companies are eyeing these smaller companies, and some acquisitions could be made soon.

Mexican tilemaker Lamosa is in talks with multiple lenders to renegotiate terms on $900m in debt raised just over a year ago to help it acquire competitor Porcelanite. A much celebrated December 2007 loan package to back the purchase included a $675m 4.7-year average life dual currency senior syndicated loan at TIIE/Libor plus 200bp out of the box. It also incorporated a $225m 7-year second lien bullet loan from Ontario Teacher’s (OTPP) paying up to 450bp over Libor. An equity follow-on of up to $300m via JPMorgan and Citi was planned to accompany the debt, but poor market conditions blocked it. A banker on the deal says Lamosa’s debt to Ebitda stood at around 4.8x a year ago, but has since spiked to around 6.2x, thanks in part to MXP depreciation and an LNG hedge that locked the company in just before a drop in the commodity. Lamosa wants to obtain waivers for leverage ratio covenants tripped on senior and subordinated loans. But at some point, likely in the second half of the year, it will probably have to extend tenors and renegotiate terms to avoid getting squeezed by the amortization schedule. The latter is seen as manageable for 2009-2010, but picks up dramatically in 2011, say bankers on the transaction. In 2009, Lamosa’s principal amortization amounts to just 5.0% of the $675m loan. “The company would be better off if the debt were repackaged,” says the banker in the lending group, noting that he expects Lamosa to stay current with payments and amortizations. Scotia, which structured and ran the syndication last year, is leading discussions with lenders. A Lamosa executive declines to comment on details of the talks.

Though criticized for execution, Mexico has succeeded in plugging this year’s funding gap with Wednesday’s sale of $1.5bn in 5.875% of 2014 bonds. The sovereign had needed to borrow about $3.2bn to meet 2009 maturities and was looking to borrow $1bn-$2bn following a $2bn December bond sale. “We wanted to get that additional funding as early as possible,” Gerardo Rodriguez, Mexico’s head of public credit, tells LatinFinance. The official notes uncertainty in the markets going forward, particularly regarding US Treasury bond yields. Rodriguez explains that Mexico was looking to shore up different parts of the curve and had received interest at the short and long ends. “A 20-year maturity is certainly not usual, but we had received some interest from investors. In the morning, we got feedback that the demand was on the short side, so we concentrated there,” he says. The last time Mexico sold a 5-year bond was a $1.5bn issue in April 2003, Rodriguez says. The finance ministry says in a statement that the issue provides a new 5-year benchmark for both public and private sector issuers. It adds that the bond financing comes at an attractive rate and also diversifies the sovereign investor base.

In a rare misread of capital markets, Mexico has raised $1.5bn through a hasty 5-year bond issue whose timing leaves investors scratching their heads. “$6bn out of Mexico in 2 months is a lot from the same well,” says a New York-based buysider who did not participate, noting a glut of recent UMS and Pemex supply. Besides excess supply in a very jittery market, the sovereign – typically a role model for EM issuers – had to pull a misguided 21-year tranche because of lack of demand. And bankers away from the issue say the hurried attempt to plug a funding gap repriced Mexico’s whole curve higher. UMS priced $1.5bn in 2014 bonds at 99.424 with a 5.875% coupon to yield 6.010%, or US Treasuries+425bp, the wide end of talk. Guidance at launch was 400bp-425bp according to investors, while the leads claim it was 425bp area. The yield represents a new issue premium of 40bp-50bp according to bankers away from the sale, using the 2019 as a reference, compared to a 40bp pickup on Mexico’s last international issue. A banker away from the transaction says it may have come as much as 60bp over the curve, while the issuer calls the premium just 15bp-20bp, using the existing 2014 as a benchmark. The original plan was to sell $1bn in each tranche. “They misread appetite for the long end, and there’s clearly some supply indigestion on the back of all this recent issuance,” says Siobhan Morden, LatAm debt strategist at RBS, referring to Pemex and UMS 2019s. Nonetheless, demand exceeded $3bn, according to bankers on the sale, which went to more than 200 accounts, approximately 55% in the US, 20% in Europe and 25% to Mexico and LatAm. Credit Suisse, Deutsche Bank and HSBC managed the sale. By stark contrast, Mexico sleekly cracked open the international bond markets for EM issuers in December with a tightly priced $2bn 5.950% of 2019 that traded steady. It came at 390bp versus guidance of 400bp area and the deal was executed at just 40bp above the 2017 – according to the leads – versus e