Organización Soriana Swap-Embedded Loan

When Mexican retailer Organización Soriana agreed to buy rival Controladora Comercial Mexicana (CCM) for 39.2 billion pesos ($2.68 billion) two years ago, it set out to raise funds at the lowest cost possible. 

By the end of that year, it had in hand 5.04 billion pesos on which it paid just 43 basis points over Mexico’s floating-rate benchmark, the TIIE. The loan, a 49-month swap-embedded facility from Japanese lender Mitsubishi UFJ Financial Group (MUFG), was cheaper than both its local market bonds and financing from a local lender.

The innovative structure of the loan — including a delayed disbursement and a floating rate in a different currency — along with the large size for its type and its competitive pricing, make it our Financing Innovation of the Year 2016.

Before the CCM acquisition, Soriana had virtually no debt, choosing instead to fund its operations with cash flow. The buyer wanted to increase leverage to finance the purchase, however, conscious of the dilutive effect of an equity offering for the family-owned business.

From Soriana’s perspective, the loan is in local currency. The company receives pesos and pays it back in pesos, based on the local TIIE rate. But from MUFG’s perspective, it is a dollar-denominated loan based on Libor. As a result, Soriana did not have to enter into an ISDA agreement or do hedge accounting, which helped keep a lid on funding costs.

Swap-embedded loans have been used before in Latin America, but only a few have been for more than $100 million. They usually are done at a fixed rate and with immediate disbursement. Soriana, however, acquired CCM through a tender offer and it did not need the money immediately. Still, the borrower and the lender locked in the price more than a month before the tender offer priced.

MUFG itself had done swap-embedded loans previously in Japan and Brazil but not in Mexico, because the local banking market had been too competitive. A concerted effort from the bank’s swaps desk helped pull off this transaction. 

Using the Soriana loan as a model, MUFG has since launched similar lines in Colombia and Peru, looking to offer a lower cost of financing to local borrowers. LF

Size: $300m

Date: November 2015

Supporting bank: MUFG

Supporting law firms: BGBG Abogados, Skadden, MUFG in-house counsel