Latin Finance - April 2008 - 16

mexican mortgages intermediary that wants to work with these markets and doesn’t have longterm funding.” But even large and long-established sofoles, which have only recently tested their luck in 2008 with new borhis issues after holding back for months from unwelcoming debt capital markets, are glad SHF’s financing doors may remain open longer. Hipotecaria Su Casita had been steadily diversifying funding ahead of SHF’s pullout and last year pre-paid more to the agency than it requested, according to CFO Mark Zaltzman. He says retaining SHF as a potential lender is heartening. “We think that 2008 is going to be a very difficult year for housing given the market conditions,” Zaltzman tells LatinFinance. “We know that the SHF will be there to help us.” total of 38 billion pesos in outstanding borhis, says Gavito. But it ended up only having to buy 1 billion pesos of the paper. Rather than fears of fundamental weakness in borhis, the official says most of selling was from foreign banks whose head offices had sent orders to ditch anything MBS-related. One way to bolster the nascent market, Gavito says, is to give investors a better understanding of what they are buying. “When you create an instrument and start to develop it, you have to watch how it evolves, get to know it and Educating Investors SHF serves as market-maker to keep borhis liquid, typically buying about a fifth of any new issue. Gavito says SHF bought more than 60% of Metrofinanciera’s 1.04 billion peso bond due 2033 after the sofol braved the market mid-February with the year’s first borhis of significant size. The UDIdenominated issue priced at 5.3%, 177 basis points over the 10-year Udibono on that day, wide to guidance of 140150 basis points. Mexican officials, including central bank governor Guillermo Ortiz, stress how detached Mexico is from US subprime troubles. Gavito says enhancements in place on borhis, including SHF’s own mortgage insurance of up to 30%, means that on average, as much as 35% of a portfolio would have to enter into default before senior tranche investors take a hit. Spread widening in the first two months of the year, particularly on some bonds fully wrapped by monolines hammered by sub-prime, suggest investors are not entirely convinced. But Gavito says the local market reaction thus far has been reassuringly measured. At the peak of monoline worries in November 2007, SHF was open to buying any of the 8 billion pesos worth of full monoline-wrapped bonds from a Educating investors: SHF’s Gavito learn how to value it,” says Gavito. “People care more about prices in the secondary market than about the borhis themselves. Often they don’t know what they’ve bought or what structure backs it up.” Hoping to bridge the knowledge gap, SHF is helping Mexico’s National Banking and Securities Commission revise regulations to force borhis issuers to provide information on key issues such as pre-payment and default rates at specific intervals. SHF will also explain the ins and outs of RMBS to investors in a series of domestic conferences and meetings that is already underway. Caretaker in Troubled Times Despite the challenges, Gavito predicts borhis issuance will maintain stellar growth and double again this year, as it did between 2006 and 2007. He expects 50 billion pesos of supply in 2008 versus 26 billion pesos last year. But he holds a somber outlook for pricing. “I think [spreads] are going to tighten a little but we aren’t going to see the spreads we saw during the first part of last year,” says Gavito. “That was the result of global liquidity. Now that there is a greater perception of risk, people are going to take more care of their investments and I think they’ll ask for a little more yield.” And for now, Gavito is relishing his role as a caretaker in troubled times. “When do you really test a market? When the market gets nervous,” he says. “I inherited a Sociedad Hipotecaria Federal that was already operating at full throttle, and sub-prime sped up the pace. It’s a lot of fun.” Analysts praise SHF’s intention to stick around at a vulnerable moment in the development of a still youthful RMBS market. “I think it’s wise that their leadership is thinking long and hard about its financing role in 2009, particularly in light of what’s going on in the global structured market and the knock on effect that might have in Mexico over the next few years,” says Magda Guillen, an associate in LatAm structured product research at Merrill Lynch. But while appreciating the job SHF has done to get the market on its feet, market participants look forward to the day it relinquishes control, at least in some areas. The omnipresence of the state in the borhis market seems like an anachronism for Mexico’s market-based economy. “We think that the private sector should be the one determining the evolution of the capital markets,” says Zaltzman. “It’s very difficult for the government to be the regulator and the developer of the capital markets.” “Eventually the Mexican mortgage market will consolidate and we can see the SHF and other government agencies take on a different role,” adds Eugenio López, senior director of structured finance and infrastructure at Fitch Mexico. “Today it is a relatively young [market] and because it is so young, the SHF’s presence brings comfort to a lot of people.” LF 16 LATINFINANCE April 2008

Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008