Mexico has not been immune to the disruptions caused by US sub-prime problems. But thanks to what is essentially a captive investor base, the country's capital markets have proven relatively resilient.
The success of President Felipe Calderon in pushing key fiscal reforms through Congress has also helped buoy sentiment, though nagging worries about a possible US recession are acting as a counter weight.
As of August, pension funds alone had about US$72bn of assets under management, and were seeing about US$1.5bn in bi-monthly inflows, according to JPMorgan. It is a similar story with mutual funds and insurance companies which have also seen assets balloon and are looking to put money to work.
On the supply side, however, Mexico is still largely dominated by a few high-grade names, though ABS transactions have been taking up some of the slack. Bankers are also hoping that a growing credit culture among investors may open the way for lower-grade corporates.
Also likely to generate more supply are infrastructure projects such as the toll-road concessions being sold by rescue fund Farac. Santander is syndicating a US$ 3.7bn loan that will help fund ICA and Goldman Sach's winning bid. A good portion of this is expected to be taken out in the local bond markets.
Nevertheless, the domestic market essentially ground to a halt in August when new issuance volumes hit just US$500m versus about US$9.5bn in the prior seven months. Once the dust settles, participants are likely to see a repricing of assets, though no one really knows how intense this process will be.
Bankers and borrowers are not looking to the secondary markets for an answer, given their illiquidity, and instead are waiting to see what happens in primary. In September several blue chips were already testing sentiment, as high-profile names like Cemex started to roadshow.
This has resulted in a standoff between high-grade borrowers, which seem unwilling to budge on pricing, and pension funds that are pushing for concessions over pre-volatility levels. But given the dearth of high-quality names and the pressure pension funds are under to invest inflows, blue chips might just get their way.
Bankers also say that while investors would like to get a volatility premium, they are concerned that higher yields in the primary market may have a knock-on effect on secondary prices and hence on their existing portfolios.
Government-backed mortgage agency Infonavit was also in the market in September with a deal that is also expected to act as a yardstick for an MBS market that has seen some infection from the US sub-prime debacle.
Comparisons between the US and Mexican housing markets are tenuous. As local bankers like to point out, one is based on doc-lite floating-rate mortgages and price speculation, while the other is being driven by a housing deficit and involves fixed-rate or inflation-linked assets to creditworthy individuals.
However, the US experience may act as an alarm bell for Mexico, where intensifying competition between mortgage lenders called Sofoles and the commercial banks may eventually lead to lax lending standards.
The immediate fear is that negative sentiment may hurt the ability of some Sofoles to access short-term funding. Local pensions have expressed a cautious attitude toward mortgage lenders in light of what is happening in the US, and rating agencies have warned that Sofoles will have to revisit their funding strategies.
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