Muni Bond Market Emerging as States Struggle to Repay Loans: Mexico Credit

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By Jonathan J. Levin and Andres R. Martinez

Mexico’s efforts to bail out cash- strapped states may jumpstart the municipal bond market in Latin America’s second-largest economy.

State-owned development bank Banobras plans to help struggling states issue bonds to refinance debt, pledging to back as much as 50 percent of the securities. Banobras Chief Executive Officer Georgina Kessel said in an Aug. 22 interview that a “few” of the country’s 31 states will need assistance as loans mature. States’ debt levels have swelled 56 percent since 2008, driven higher in part by infrastructure spending, according to data compiled by the Finance Ministry.

Mexico’s municipal bond market is almost non-existent today, compared with the $2.9 trillion market in the U.S., as most states take out bank loans to finance deficits. In Brazil, states have been barred from issuing bonds since the federal government restructured their debt in 1999. Initial offerings under the Banobras plan may yield about 100 basis points more than government debt, according to Alonso Madero, who helps manage about $5.5 billion at Corp. Actinver SAB.

“We’re creating favorable conditions so there’s appetite for this type of paper,” Kessel, a former energy minister, said in an interview at Banobras headquarters in Mexico City. She said states want to sell bonds with maturities of up to 25 years while declining to comment on how much debt could be issued.

Banobras peso-denominated bonds due in 2015 yield 4.87 percent, which is seven basis points, or 0.07 percentage point, more than similar-maturity federal government debt, according to data compiled by Bloomberg. Moody’s Investors Service rates Banobras local debt Baa1, the third-lowest investment-grade ranking and in line with the federal government.

Initial Sales

Mexican states’ debt climbed to 317 billion pesos ($26 billion) in June, equal to 2.3 percent of gross domestic product, from 203 billion pesos at the end of 2008. The national government, by comparison, had a total debt of 3.8 trillion pesos in June, equal to 27 percent of GDP. The states’ obligations, while growing, remain too low for investors to worry that the Banobras plan will swell the federal government’s debt, said Gabriel Casillas, chief Mexico economist for JPMorgan Chase & Co.

“There isn’t a lot of concern about the impact on federal finances,” Casillas said in a phone interview from Mexico City.

The first bonds may be sold under the Banobras program in a “matter of weeks,” Carlos Garza, head of state relations at Mexico’s Finance Ministry, said in an Aug. 22 interview. The sales will be open to local investors and foreigners, helping develop the country’s municipal bond market, he said.

Coahuila Debt

Banobras unveiled the bond guarantee plan on Aug. 18, a day after a lawmaker from Coahuila said that the state had 33.9 billion pesos of debt, four times more than the figure reported in May.

Standard & Poor’s cut Coahuila’s national scale debt rating five levels to BBB- from A+ on Aug. 18. S&P lowered Veracruz to BBB- from BBB+ in November 2010. S&P has since stopped rating Veracruz.

State governments took out bank loans to boost spending on infrastructure projects and to finance growing deficits in the run-up to elections, said Eduardo Uribe, an S&P analyst in Mexico City.

“In some cases it had to do with an infrastructure deficit, but in others they took advantage of that deficit to start big projects with political implications,” Uribe said in a telephone interview. “They don’t have sufficient liquidity to pay for their short-term debt.”

Nuevo Leon, Michoacan

Coahuila and Veracruz are among states facing the “most acute” debt problems, along with Quintana Roo, Nuevo Leon, Nayarit and Michoacan, the Finance Ministry’s Garza said. Mexico chose to help the states arrange financing because a direct bailout would have sent “the wrong message,” he said.

States have few means to generate revenue, leading many to take on debt to supplement the funds they receive from the federal government, Veracruz Governor Javier Duarte told reporters in Mexico City on Aug. 18. Veracruz plans to issue bonds under the Banobras program, he said.

“The states have too few sources of income and that makes us highly dependent” on the national government, Duarte said. “Debt has become the only way to attend to the needs of your population.”

Default Swaps

Coahuila is “interested” in the Banobras program and has met with bank officials to learn more, according to a joint e- mailed response to questions from state Treasurer Jesus Ochoa Galindo and Ismael Ramos Flores, head of the local tax agency.

Press officers Sandra Edith Martinez of Nayarit and Miriam Pinto of Quintana Roo didn’t respond to phone calls seeking comment. Mireya Guzman, state finance secretary of Michoacan, didn’t respond to a phone call and e-mail message nor did Nuevo Leon’s secretary general, Javier Trevino.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries held at 211 basis points yesterday, according to JPMorgan’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years rose seven basis points to 158, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Record-Low Yields

The peso rose 0.4 percent to 12.3131 per U.S. dollar.

Yields on interest-rate futures contracts for December delivery, known as TIIE, rose two basis points to 4.73 percent.

The debt crises in Europe and the U.S. as well as concern about a slowdown in the global economy may crimp investor demand for securities issued by struggling Mexican states, said Miguel Angel Aguayo, a fixed-income analyst at Grupo Financiero Banorte-Ixe.

“I’m skeptical, above all because of the current economic environment, that the public is ready to take that type of risk,” Aguayo said in a telephone interview from Mexico City.

Still, Alejandro Urbina, who oversees $800 million of assets at Silva Capital Management inChicago, said he’d be interested in buying the notes because of the yield premium they’d offer over federal government debt. Yields on Mexican benchmark peso bonds due 2024 touched a record low 6.04 percent on Aug. 18.

“I would buy this,” Urbina said in a telephone interview. “This would work well for me as an investor, giving me a pickup on the sovereign.”

To contact the reporters on this story: Jonathan J. Levin in Mexico City atjlevin20@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos atpapadopoulos@bloomberg.net

About northernbarbarians

I'm an activist and advocate for human rights and the establishment of penalties to the simulators and inconsistent. My fight is for respect for universal rights and freedoms. Journalist various print and electronic media in several countries. Independent research analyst of social risks in unions, political, corporate and institutional image. Four books published and three in electronic version. Live one day at a time, even on payments, sometimes alive yesterday. Modest income is the price of freedom.
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