The Busiest Market in Mexico

Suddenly, more domestic bonds give business a boost

Four years ago, when the Mexican affiliate of Ford Credit International wanted to get its hands on more cash to turn into low-interest car loans, it could have gone the usual route: taking out bank loans carrying an interest rate of 20% or higher. Instead, Ford tapped Mexico's fledgling domestic debt market. Since then, the American auto maker's financing arm has placed more than $1 billion in peso-denominated bonds, with yields as low as 7.68%. "We never could have grown at this pace otherwise," says Oscar Adad, general director of Ford Credit de México. Sales of Ford vehicles have jumped 54% since 1999.

Adad and other executives are witnessing a phenomenon unimaginable just a few years ago: the emergence of a Mexican market for corporate bonds. In 1998, the combined value of all corporate debt issues in Mexico didn't even reach $1 billion; this year alone, the figure is on course to top $3 billion. That's still peanuts by the standards of New York or London, but it's a considerable sum in a country where bank financing is scarce and where only top-tier companies have access to international capital markets. "The development of a local debt mar-ket is the most important structural change Mexico has seen in the last six years," says Guillermo Babatz, general director of insurance and securities at Mexico's finance ministry.

The catalyst was a 1997 law, modeled on Chile's, that allowed for the creation of privately managed pension funds that would eventually replace the government-run system. Today, 26 million Mexicans have private accounts, and the value of their portfolios is swelling at the rate of $500 million a month. The real rate of return on these funds averaged 6.8% in the 12 months to August. "With pension-fund assets growing so fast, we need to find safe and profitable places to invest so that we can pay out secure pensions," says Francisco González, head of Grupo Financiero BBVA-Bancomer's pension fund, the country's second-largest, with $6.4 billion in assets.

Until recently, Mexico's pension funds were required to invest two-thirds of their holdings in government securities. But starting this year, they can fill their entire portfolio with AAA-rated corporate bonds and a smaller percentages of lower-rated bonds. (Equities are still out, for now.) The change in regulations could not have come at a better time for Mexican companies: Argentina's debt default and pre-election jitters in Brazil have soured investors on emerging markets. So even the bluest of Mexican blue chips are finding it increasingly costly to borrow abroad.

That's why more are raising money at home. One of the country's most active debt issuers is Cemex, which has drummed up $850 million locally in the past two years. In April, the cement giant placed $120 million worth of five-year bonds. Mexican pension funds bought up more than half the paper. Also driving demand are Mexican insurers and local mutual funds, whose assets swelled 60% in 2001 as individual investors switched out of Mexican treasuries and into higher-yielding funds. "I'd like to think that in the future, Cemex could satisfy its financing needs completely in Mexico," says Humberto Lozano, Cemex' director of corporate financing and banking relations.

The savings for Mexican companies could be great. The April Cemex issue carried a rate of 1% over the benchmark London interbank offered rate (LIBOR)--half the spread the company would have had to offer to raise an equal sum in the U.S. or Europe. The lower rate reflects the fact that peso-denominated securities carry no currency risk. Many Mexican companies with dollar debt were bankrupted by the 1994 peso devaluation.

Su Casita is another Mexican company taking advantage of this new outlet. Since 2000, the Mexican builder and mortgage lender has issued $93 million in bonds to help finance 63,000 mortgages of up to 25 years. By next year, 20% of its financing will come from debt paper. "We're doing things that we could only dream about two years ago," says vice-president Manuel Campos.

Indeed, the only thing stopping the market from growing even faster is the availability of investors. There are just 11 pension-fund managers operating in Mexico, with a combined $30 billion in assets, along with a handful of insurers and mutual funds. "The amounts you can place are very limited, because there are restrictions on how much paper each pension fund can hold from a single issuer," says Lozano. Still, no one doubts that the surprising rise of the local bond market has radically changed Mexico's financial system.

By Geri Smith in Mexico City

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