attracting foreign investment for the debt capital markets ... capital markets in mexi… ·...

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Attracting Foreign Investment for the Debt Capital Markets in Mexico:

Assessing Obstacles and Opportunities

Robert L. RauchPartner and Portfolio Manager

GramercySeptember 11, 2012

We are Emerging Markets®

• What are Main Types of Foreign Investors

• Main types of Mexican Fixed Income Investments considered by Foreign Investors

• Comparison of Mexican Opportunities with other Emerging Markets

• Issues Affecting Foreign Investment

Overview

1

What are Main Types of Foreign Investors

We are Emerging Markets® 3

Central Banks

Sovereign Wealth Funds

Banks

Institutional Investors

Pension Funds

Insurance Companies

Mutual Funds and Other Public Investment Funds

Other Long-Only Institutional Investors

Alternative Investors

Hedge Funds

Private Equity Funds

Smaller Money Managers

Private Clients of Banks (including flight capital investors)

Global Investors in Mexican Debt Instruments

Main types of Mexican Fixed Income Investments considered by Foreign

Investors


United Mexican States (UMS) are long-term sovereign Mexican bonds issued by the federal government in international capital markets. Each issuance has specific characteristics and offer considerable liquidity and are preferred by foreign investors.

As of September 2012, there are currently MXN 557,068.3 million (US$ 43 billion) UMS bonds outstanding

Weighted averaged coupon of approximately 5.82%

Weighted average years to maturity is approximately 17 years

Key characteristics: complete yield curve with maturities ranging from six months to 30 years, among most liquid emerging market sovereign debt, fixed or variable interest

U.S. Dollar Sovereign Bonds

Source: Bloomberg.


U.S. Dollar Sovereign Bonds Source: Bloomberg.

Security Amt Out (mm) Currency YTM (%) SpreadMexico Government International Bond 6.375% due Jan 16, 2013 1,079.1 USD 0.43 32United Mexican States 5.1% due Feb 15, 2013 3.0 USD 0.89 90Mexico Government International Bond 7.375% due Apr 08, 2013 588,466.0 ITL 2.00 124Mexico Government International Bond 5.375% due Jun 10, 2013 615.0 EUR 0.12 12Mexico Government International Bond 5.875% due Jan 15, 2014 1,272.5 USD 0.80 87Mexico Government International Bond 5.875% due Feb 17, 2014 1,427.3 USD 1.06 86Mexico Government International Bond 6.625% due Mar 03, 2015 1,286.0 USD 0.98 84Mexico Government International Bond 1.29% due Jun 08, 2015 50,000.0 JPY 1.21 112Mexico Government International Bond 4.25% due Jun 16, 2015 578.7 EUR 1.06 96Mexico Government International Bond 11.375% due Sep 15, 2016 1,585.7 USD 1.21 72Mexico Government International Bond 5.625% due Jan 15, 2017 3,209.1 USD 1.49 95Mexico Government International Bond 11% due May 08, 2017 330,935.0 ITL 1.92 -175Mexico Government International Bond 1.56% due Jun 08, 2017 30,000.0 JPY 1.47 128Mexico Government International Bond 4.25% due Jul 14, 2017 850.0 EUR 1.87 135Mexico Government International Bond 5.95% due Mar 19, 2019 2,822.2 USD 1.99 101United Mexican States 2.22% due Dec 20, 2019 150,000.0 JPY 1.66 122Mexico Government International Bond 8.125% due Dec 30, 2019 1,343.7 USD 1.63 49Mexico Government International Bond 5.125% due Jan 15, 2020 2,806.8 USD 2.20 104Mexico Government International Bond 5.5% due Feb 17, 2020 545.1 EUR 2.68 161Mexico Government International Bond 5.5% due Feb 17, 2020 554.7 EUR 2.54 154Mexico Government International Bond 1.51% due Oct 28, 2020 150,000.0 JPY 1.80 125Mexico Government International Bond 3.625% due Mar 15, 2022 2,559.3 USD 2.50 93Mexico Government International Bond 8% due Sep 24, 2022 611.2 USD 2.91 125Mexico Government International Bond 6.75% due Feb 06, 2024 476.5 GBP 4.34 247Mexico Government International Bond 11.5% due May 15, 2026 327.9 USD 3.25 138Mexico Government International Bond 8.3% due Aug 15, 2031 1,327.5 USD 3.68 151Mexico Government International Bond 7.5% due Apr 08, 2033 1,013.6 USD 3.75 148Mexico Government International Bond 6.75% due Sep 27, 2034 2,840.3 USD 3.85 150Mexico Government International Bond 6.05% due Jan 11, 2040 4,208.1 USD 3.95 129Mexico Government International Bond 4.75% due Mar 08, 2044 2,963.3 USD 4.00 120Mexico Government International Bond 5.75% due Oct 12, 2110 2,678.0 USD 4.68 187

Total $42,984.5


Mexican Peso Sovereign BondsCETES are peso-denominated treasury bills that were for a long time the leading instruments in the Mexican money market. They are still a significant reference, with their main advantages being flexibility, liquidity and yield.

As of September 2012, there are currently MXN 608.2 billion (US$ 47 billion) CETES outstanding

Weighted average years to maturity is approximately 0.3 years, ranging from 2012 to 2013

Key characteristics: various maturities, low default risk due to government guarantee, liquidity through active secondary market, and return on CETES acts as interest rate base for financial operations

Source: BBVA Bancomer, Bloomberg.

Bonos are peso-denominated fixed-interest federal government development bonds that are issued and placed for periods of more than one year and pay fixed-rate interest every six months.

As of September 2012, there are currently MXN 1,631.1 billion (US$ 125 billion) Bonos outstanding

Weighted average fixed coupon of approximately 8.0%

Weighted average years to maturity is approximately 8.5 years, ranging from 2012 to 2042

Key characteristics: low default risk due to government guarantee, flexible maturity period, and significant secondary market liquidity

Udibonos are peso-denominated inflation-linked securities issued by the Mexican Government. The bonds are redeemed at face value at maturity, though face value is adjusted for changes in the Mexican Consumer Price Index.

As of September 2012, there are currently MXN 677.3 billion (US$ 52 billion, includes inflation adjustments) Udibonos outstanding

Weighted average fixed coupon of approximately 4.09% (plus inflation)

Weighted average years to maturity is approximately 12 years, ranging from 2012 to 2040

Key characteristics: inflation-linked nature makes it ideal for insurance companies and pension funds as it ensures savings growth in real terms, seasonal nominal returns due to CPI fluctuations


Mexican Peso Sovereign Bonds – Cetes

Source: Bloomberg.

Security Amt Out (US$)Mexico Cetes due Sep 13, 2012 1,078.0Mexico Cetes due Sep 20, 2012 5,274.5Mexico Cetes due Sep 27, 2012 1,155.0Mexico Cetes due Oct 04, 2012 2,695.0Mexico Cetes due Oct 11, 2012 847.0Mexico Cetes due Oct 18, 2012 2,579.5Mexico Cetes due Oct 25, 2012 539.0Mexico Cetes due Nov 01, 2012 1,848.0Mexico Cetes due Nov 08, 2012 539.0Mexico Cetes due Nov 15, 2012 1,848.0Mexico Cetes due Nov 22, 2012 539.0Mexico Cetes due Nov 29, 2012 1,925.0Mexico Cetes due Dec 06, 2012 616.0Mexico Cetes due Dec 13, 2012 4,096.4Mexico Cetes due Dec 27, 2012 1,347.5Mexico Cetes due Jan 10, 2013 1,386.0Mexico Cetes due Jan 24, 2013 1,386.0Mexico Cetes due Feb 07, 2013 2,117.5Mexico Cetes due Feb 21, 2013 693.7Mexico Cetes due Mar 07, 2013 693.0Mexico Cetes due Apr 04, 2013 6,853.0Mexico Cetes due May 30, 2013 1,463.0Mexico Cetes due Jun 13, 2013 3,850.0Mexico Cetes due Jul 25, 2013 1,463.0

Total $46,832.1

Cetes Yield (%)O/N 4.471W 4.291M 4.373M 4.286M 4.451Y 4.59


Mexican Peso Sovereign Bonds – Bonos

Source: Bloomberg.

Security Amt Out (US$) YTM (%)Mexican Bonos 9% due Dec 20, 2012 6,547.5 4.29Mexican Bonos 9% due Jun 20, 2013 6,921.0 4.54Mexican Bonos 8% due Dec 19, 2013 8,108.0 4.61Mexican Bonos 7% due Jun 19, 2014 5,089.9 4.63Mexican Bonos 9.5% due Dec 18, 2014 8,811.8 4.70Mexican Bonos 6% due Jun 18, 2015 8,316.8 4.75Mexican Bonos 8% due Dec 17, 2015 5,356.8 4.82Mexican Bonos 6.25% due Jun 16, 2016 5,174.4 4.85Mexican Bonos 7.25% due Dec 15, 2016 4,650.6 4.87Mexican Bonos 5% due Jun 15, 2017 2,310.0 4.97Mexican Bonos 7.75% due Dec 14, 2017 5,838.6 4.93Mexican Bonos 8.5% due Dec 13, 2018 3,279.8 5.05Mexican Bonos 8% due Jun 11, 2020 5,159.0 5.18Mexican Bonos 6.5% due Jun 10, 2021 5,308.8 5.38Mexican Bonos 6.5% due Jun 09, 2022 4,312.0 5.46Mexican Bonos 8% due Dec 07, 2023 1,969.6 5.57Mexican Bonos 10% due Dec 05, 2024 6,561.7 5.60Mexican Bonos 7.5% due Jun 03, 2027 7,123.9 5.97Mexican Bonos 8.5% due May 31, 2029 6,875.6 6.16Mexican Bonos 7.75% due May 29, 2031 4,658.5 6.38Mexican Bonos 10% due Nov 20, 2036 4,808.5 6.63Mexican Bonos 8.5% due Nov 18, 2038 6,908.5 6.66Mexican Bonos 7.75% due Nov 13, 2042 1,501.5 6.68

Total 125,592.8 5.26


Mexican Peso Sovereign Bonds – Udibonos

Source: Bloomberg.

Security Amt Out (US$) YTM (%)Mexican Udibonos 5.5% due Dec 20, 2012 689.2 0.00Mexican Udibonos 3.5% due Dec 19, 2013 787.7 0.06Mexican Udibonos 4.5% due Dec 18, 2014 1,348.3 0.33Mexican Udibonos 5% due Jun 16, 2016 832.1 0.53Mexican Udibonos 3.5% due Dec 14, 2017 1,020.8 0.77Mexican Udibonos 4% due Jun 13, 2019 783.5 1.09Mexican Udibonos 2.5% due Dec 10, 2020 964.5 1.31Mexican Udibonos 2% due Jun 09, 2022 231.0 1.52Mexican Udibonos 4.5% due Dec 04, 2025 659.4 1.77Mexican Udibonos 4.5% due Nov 22, 2035 1,869.7 2.63Mexican Udibonos 4% due Nov 15, 2040 1,705.6 2.68

Total (w/o inflation adjustment) $10,891.7 1.36Total (w/ inflation adjustment) $52,066.9 1.36


Key Trends in Mexican Peso Sovereign Bonds

Source: JPMorgan.


Peso-Denominated Sovereign Bonds

Foreign holders of Mexican sovereign debt are primarily central banks, insurance companies, and sovereign wealth funds. As a result, lower foreign outflows are expected during high volatility periods.

2%

18%

33%

23%

31%

36%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2009 2010 2011

Cetes Bonos

Total Amount Outstanding of Mexican Sovereign Bonds Foreign Investment % of Mexican Sovereign Bonds

Source: Banxico. Source: Banxico.


U.S. Dollar Corporate Bonds

Source: JPMorgan.

TickerNo. of Issues Avg. Cpn

Avg. Maturity

Total Amt ($mm) S&P Mdys Fitch Primary Sector Secondary Sector Avg. YTM Avg. SOT

Avg. Z-Spd

ALFAA 2 10.625 2014 315.2 BB+ NA BB+ Industrial Petrochemicals/Chemicals 3.57 293 313AMXLMM 12 4.917 2024 13,882.0 A- A2 A TMT Wireless Telecom 2.51 63 110AXTEL 2 8.313 2018 765.0 CCC+ Caa2 B- TMT Fixed Telecom 19.37 1,770 1,848BANORT 2 5.619 2018 500.0 NA Ba1 NA Financial Banks 3.99 284 301BBVASM 5 6.202 2020 4,500.0 NA A3 BBB Financial Banks 4.93 324 363BIMBOA 2 4.688 2021 1,600.0 NA Baa2 BBB Consumer Food/Beverage 3.33 166 185CASITA 1 7.500 2018 31.7 NA NA NA Financial Consumer Finance 69.58 6,792 6,877CEMEX 8 7.648 2030 6,711.1 CCC+ NA B+ Industrial Building Products 9.28 787 793CFELEC 2 5.313 2031 1,750.0 BBB Baa1 BBB Utilities Electricity Integrated 4.08 184 211COMMEX 1 7.000 2018 223.9 NA NA NA Consumer Food/Beverage 6.98 531 604CREAL 1 10.250 2015 210.0 BB NA NA Financial Consumer Finance 6.22 558 578EKT 1 7.250 2018 550.0 NA NA BB- Consumer Retail 7.25 661 629FAMSA 1 11.000 2015 200.0 B NA B+ Consumer Retail 8.97 833 850FINDEP 1 10.000 2015 200.0 BB- NA BB- Financial Consumer Finance 9.10 846 866GEOBMM 3 9.000 2019 704.2 BB- Ba3 BB- Real Estate Homebuilders 8.33 701 726GRUMA 1 7.750 2049 300.0 BB NA BB Consumer Food/Beverage 7.66 484 536HOMEX 3 8.917 2018 899.9 NA Ba3 BB- Real Estate Homebuilders 8.45 678 749ICASA 2 8.638 2019 850.0 B+ B1 NA Infrastructure Building Products 7.99 684 693JAVER 2 11.438 2017 450.0 NA B1 B+ Real Estate Homebuilders 8.56 792 765KOF 1 4.625 2020 500.0 A- A2 A Consumer Food/Beverage 2.47 81 118KUOBMM 1 9.750 2017 250.0 BB NA BB Industrial Diversified Industrial 8.05 638 726MABEMX 1 7.875 2019 350.0 BB+ NA BB+ Consumer Manufacturing 5.71 405 453MAXTEL 1 11.000 2014 199.5 CCC+ Caa1 NA TMT Fixed Telecom 38.21 3,655 3,778MXCHF 1 8.750 2019 350.0 NA Ba1 BBB- Industrial Petrochemicals/Chemicals 4.93 327 375NIHD 3 8.833 2019 2,750.0 B- B2 NA TMT Wireless Telecom 11.60 993 1,055OCEANO 1 11.250 2015 335.0 NR NA WD Infrastructure Pipelines 29.75 2,809 2,928PAPPEL 1 7.000 2016 300.0 NA NA B Pulp & Paper Paper Products 13.51 1,185 1,292PEMEX 14 5.993 2026 20,551.6 BBB Baa1 BBB Oil & Gas Integrated Oil & Gas 3.62 123 174POSADA 1 9.250 2015 200.0 CCC+ B3 B- Real Estate Hotels/Resorts 9.00 836 858SATMEX 1 9.500 2017 325.0 B B3 NA TMT Satellite 8.44 678 773SCRIBE 1 8.875 2020 300.0 B+ B1 NA Pulp & Paper Paper Products 11.94 1,027 1,071SENDA 1 10.500 2015 150.0 B NA B Transport Other Transport 8.97 731 848SIGMA 2 6.250 2019 700.0 BBB- NA BBB- Consumer Food/Beverage 3.75 209 269TELVIS 4 6.938 2028 1,999.4 BBB+ Baa1 BBB+ TMT Media 3.85 132 196TFONY 2 5.500 2017 927.7 A- A2 A TMT Fixed Telecom 1.88 22 106TZA 1 7.500 2018 300.0 NA NA BB- TMT Media 6.44 477 552URBIMM 3 9.250 2019 950.0 NA Ba3 B Real Estate Homebuilders 10.11 845 905VITROA 2 10.000 2017 925.9 NA NA NA Industrial Manufacturing 21.41 2,077 2,065

Total 94 6.522 2024 67,007.0 5.62 373 416


Current State of Mexican Corporate Bond Market

In the first 8 months of 2012, Mexican corporates have issued approximately $13.6 billion in dollar- or Euro-denominated debt. Of that amount, approximately 86% was comprised of investment grade issuances, while only approximately 14% consisted of high yield issuances.

Brazil, 53%

Mexico, 23%

Chile, 6%

Peru, 6%

Other, 12%

Investment Grade, 86%

High Yield, 14%

Source: Bond Radar.

2012 YTD Latam Corporate New Issuances by Region 2012 YTD Mexico New Issuances by Credit Quality


Mexican investment grade bonds

15



Mexican high yield corporate bonds

16




AMXLMM 35

AXTEL 19

BIMBOA 20

CEMEX 18

GRUMA Perp

ICASA 21

KOF 20

MXCHF 19

TFONY 19

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

0 1 2 3 4 5 6 7

Spre

ad to

Tre

asur

ies

Gramercy Credit Score

Using a representative sample of the Mexican corporate bond universe, we determine that most corporates are trading in line with where their credit score would suggest.

Source: Moody’s, Gramercy Analysis.


• There are approximately Ps. 994,454 million ($76.5 billion) in peso corporate bond outstanding (including those issued by state-owned companies) as of August 2012, according to Banamex.

• Peso-denominated corporate bonds are less liquid than Bonos and, in general, investment grade debt tends to have better liquidity than high yield

• Market has been growing since 2010, primarily high grade issuers with some high yield

18

Mexican Peso-denominated Corporate Bonds

Udis, 35.0%

Pesos, 65.0%

, 0 , 0

Amount outstanding, per denomination

Ps. 0

Ps. 100,000

Ps. 200,000

Ps. 300,000

Ps. 400,000

Ps. 500,000

Ps. 600,000

Ps. 700,000

Ps. 800,000

Ps. 900,000

AAA AA+ AA- AA A+ A- A BBB+or <

Mill

ion

peso

s

Amount outstanding, per rating

Source: Banamex, August 31 2012


Mexican Peso-denominated Corporate Bonds

Source: Banamex, August 31 2012

39%

11%11%

9%

6%

5%

5%

5%4%

2%3%

Amount outstanding, by industry

FinancialservicesRoads (Gov't)

Pemex

Paper

CFE

Telecom

Infrastructure

Local govt's

Consumer

Construction

OthersPs. 0 Ps. 50 Ps. 100 Ps. 150

Pemex

CFE

Infonavit

Banobras

BBVA-…

Banco Inbursa

America Movil

Banorte

Santander

Su Casita

Ten largest corporate issuers (thousand million pesos)


Global NPL Markets

Mexico• NPL Mkt Size: $10Bn

Colombia• NPL Size: $4Bn

Brasil• Mkt Size: $100Bn

United States• NPL Mkt Size:

$485Bn

United Kingdom• NPL Mkt Size:

$160BnChina• NPL Mkt Size: $75Bn

Japan• NPL Mkt Size: $187Bn

Korea• NPL Mkt Size: $12Bn

Philippines• NPL Mkt Size: $2Bn

Taiwan• NPL Mkt Size: $8Bn

Thailand• NPL Mkt Size: $15Bn

Malaysia• NPL Mkt Size: $10Bn

Primary MarketsSecondary Markets

Figures in US$ Billion unless indicated.Sources: IMF; Countries Central Bank; NPL Industry Reports (Deloitte, E&Y, PWC ) ; Printed Media Articles.


Market Size & NPL Ratios in EMs

Figures in US$ Billion unless indicated otherwise Sources: IMF; Countries Central Bank; NPL Industry Reports from Deloitte, E&Y, PWC; Printed Media Articles. from fall 2008 to Summer 2010

Latin America Emerging Europe

Mexico ~$20Bn

Colombia ~$4Bn

Brasil ~$85Bn

Argentina ~$3BnChile ~$3Bn

Emerging Asia

Turkey ~$15Bn

Russia ~$30Bn

Greece ~$30Bn

Poland ~$14Bn

Turkey ~$15Bn

Croatia/Slovenia ~$8Bn

Ukraine ~$8Bn

$325Bn+ of NPLs in EMs

Indonesia ~$5Bn

Thailand ~$15Bn

Malaysia ~$10Bn

China ~$75Bn

Source: IMF

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2005 2006 2007 2008 2009 2010

CO MX BR CH AR

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

2005 2006 2007 2008 2009 2010

TR RU HR PL UA

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005 2006 2007 2008 2009 2010

CN PH ID TH

NPL Ratios: Latin America NPL Ratios: Emerging Europe NPL Ratios: Emerging Asia


Non-performing Loans

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Sofomes Bancos

0

5

10

15

20

25

30

35

40

45

Sofomes Bancos

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Sofomes Bancos

Mortgage NPL Ratio (as of Q1’ 11)

• Total NPL market size estimated up to U.S. $15 billion but is expect to increase in line with this credit expansion as NPLs are an unavoidable byproduct of lending

• Even though current NPL ratios are low, the Mexican Banking Commission, (Comision Nacional Bancaria y de Valores or “CNBV”) is already reporting an increase

in past-due amounts in April (vs. prior year) of 22.6% for mortgages; 20.5 % for commercial loans; and 14.5% for consumer loans primarily credit cards

• The portfolios of non-banking mortgage lenders (e.g. Sofoles) have high NPL ratios and their portfolios continue to deteriorate at a fast pace

• The early implementation of Basel III in the second half of 2012, (2.6 years ahead of schedule of the Committee on Banking Supervision) will further incentivize

lenders to actively manage and/or dispose of the NPLs in their books

Source: CNVB website statistics as of Q1 2012

Commercial NPL Ratio (as of Q1’ 11) Consumer NPL Ratio (as of Q1’ 11)

% o

f tot

al lo

ans

% o

f tot

al lo

ans

% o

f tot

al lo

ans


Mortgage securitizations

The mortgage securitization market was developed in 2003 and was an efficient funding source for the housing sector up until 2007.

Since 2009, private securitizations have practically disappeared and the market has become dominated by issuance from the public housing institutes.

The performance of RMBS portfolios has been mixed, with Sofoles-sponsored issues having difficulties with high delinquency ratios. The average ratio for Sofoles RMBS was 11.08% in 2009 and several portfolios surpass 25%.

Mortgage securitizations (US$ billion)

Source: SHF

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

2003 2004 2005 2006 2007 2008 2009 2010 2011

Banks/Sofoles

INFONAVIT/FOVISSSTE

Comparison of Mexico with Other Emerging Market Opportunities


Mexican US$ Sovereign Bonds


Mexican Peso Bonds


Mexico’s Default Swaps at Premium to Many European Countries

37 5384 86

99 118 118 130140

347380 390

520

0

100

200

300

400

500

600

5-ye

ar C

DS

spre

ads

(bp)

Dec. 2009Current


Latam High Grade Corporate Performance Since 12/30/2011

Latam High Yield Corporate Performance Since 12/30/2011

Source: Credit Suisse.


Latam Corporates Offer Positive Spread Pick-up to Latam Sovereigns

Source: Credit Suisse.


Mexican vs. Brazilian High Yield* Corporates: the “Vitro Premium”

* Double-B and Single-B IssuesData as of September 7, 2012

Source: JPMorgan, Gramercy.

# of Issuers

# of Issues

Face Value ($mm)

Wtd. Avg YTW (%)

Wtd. Avg Spread (bps)

Wtd. Avg Z-Spread (bps)

Brazil HY 33 60 $25,574.2 7.87 653 701Mexico HY 24 43 $18,429.9 8.99 828 877

Difference -9 -17 ($7,144.3) 1.12 175 176

Banco ABC Banco Panamericano DASA Finance MarfrigBanco BMG BES Investimento Empresa Energetica MinervaBanco Bonsucesso BR Malls Energisa Geracao Navios MaritimeBanco Brasil CESPBZ Fibria OGX PetroleoBanco Daycoval Cia Saneamento Friboi SuzanoBanco Est Rio Grande Cimento Tupi Gol TamBanco Fibra Construcoes e Comercio Hypermarcas UsiminasBanco Industrial Cosan Magnesita VirgolinoBanco Mercantil

Alfa SAB Financiera Indepen. Homex ScribeAxtel Gruma ICASA TV AztecaBanco Mercantil Norte Grupo Elektra Javer UrbiBio Pappel Grupo Famsa MabeCemex Grupo Kuo MaxtelCorp GEO Grupo Posadas NII HoldingsCredito Real Grupo Senda Satmex

Brazil HY Corporate Issuers

Mexico HY Corporate Issuers

Issues Affecting Foreign Investment


• Strong macroeconomic fundamentals (rated (BBB / Baa1)

• Capable, independent Central Bank

• Significant progress in the democratization of the political process

• Wide range of investment instruments available to international investors

• Proximity to United States and positive impact of NAFTA

• Favorable demographics

• Improving business climate (in the most recent World Bank Study “Doing Business 2012,” Mexico succeeded in reducing the number of average days to complete all paperwork required to start a business from 28 days to 9 days, as well as the number of business procedures from 8 to 6, Mexico moved up one position, from 53 to 52, scoring better than Brazil, India, China and Russia)

32

Attractive Elements to the Mexican Investment Climate


• From a debt investors perspective, the objective of analysis is to look at the risk adjusted return of an investment relative to other alternatives

• Stated simply, in a debt instrument the best an investor can do is to collect all his interest and be repaid par at maturity; thus, the key to the analysis is to evaluate all the possible things that might occur to put the timely payment of interest and principal at risk

• While there is little concern about the creditworthiness of Mexico as a sovereign issuer, due to the perception of both its ability to pay and more importantly its willingness to pay, there are significant and growing concerns about non-investment grade rated corporate debt investments

• This issues stem from what investors perceive to be the one area where Mexico has lagged the progress made in so many other areas: the “rule of law”

• Concerns fall in three broad categories: corruption, transparency, and the impunity in which certain players can take advantage of the laws. The recent Vitro case also highlights the downside risks that concern international investors.

33

Concerns of Foreign Investors


Transparency and Corruption


• In late 2008, many companies failed to disclose their derivative exposures, which led to losses that triggered several defaults. Mexico’s third-largest supermarket chain, Controladora ComercialMexicana SAB, sought bankruptcy protection after it failed to disclose more than $1 billion in derivatives liabilities tied to the declining peso. Gruma SAB, Mexico’s biggest maker of corn flour for tortillas, also failed to disclose its derivative exposure prior to announcing it had derivatives tied to the currency with a negative value of more than $788 million.

• Grupo Elektra will remain on the IPC index after obtaining a court injunction forcing the stock exchange to use an older methodology to determine its weighting. Salinas’s company is suing the Bolsa for unspecified damages after the exchange operator’s announcement of a new methodology on April 11 led to a drop of as much as 68 percent. The Bolsa didn’t say whether Elektra would have remained on the index under the new methodology, which accounts for shares that are restricted by derivative contracts. Elektra had derivative contracts tied to its stock price representing about 14 percent of its shares as of June 19, 2012.

35

Poor transparency and disclosure


OHL Mexico: Today, OHL Mexico announced that a federal judge ruled in its favor in its dispute against the state of Puebla for its unilateral decision this year to terminate a city bypass concession. The State of Puebla arbitrarily revoked a concession to the Mexican subsidiary of Spain's OHL on May 9 under the legal position of "rescuing a public asset" without compensation. OHL Mexico had initiated legal action against the government of Puebla state for its "surprising and unilateral" decision to revoke its concession to build and operate a 35-kilometer (22-mile) expressway.

Grupo Iusacell: In February 2012, Antitrust officials delivered documents to Grupo Iusacell after a physical confrontation, preserving the Mexican government’s ability to enforce a ruling on the wireless carrier’s transaction with Grupo Televisa. Iusacell initially changed the physical numbers of the building in order to avoid receiving the notification. The antitrust lawyers argued with Iusacell security people for 20 minutes before being granted access to the lobby of the building, where the attorneys were prevented from advancing further. According to newspaper reports, one antitrust representative suffered a blow to the face that will leave a bruise while not requiring medical attention. Barring the antitrust attorneys access is against regulations.

Codisco/Unefon: In 2003, Codisco, a vehicle formed and partly owned by Ricardo Salinas Pliego, TV Azteca’s owner, made a profit of US$218 million by arbitraging Unefon’s defaulted supplier’s credits. Codisco paid Nortel Networks US$107 million for Unefon’s US$325 million obligation. They then restructured the debt at par with Unefon, and Unefon repaid them four months later (at par) with proceeds from another transaction. TV Azteca, a publicly traded company at the time in the US and Mexico, controlled Unefon with 46.5 percent. The SEC accused TV Azteca and its chairman of securities fraud as the company failed to tell shareholders about the Codisco transaction, but after the company delisted itself in the US ended up settling for a small fine. No action was taken in Mexico.

36

Practices of impunity that damage investor confidence are still common


Mexico's Grupo Fertinal filed a US$900 million suit back in 2003 against the local unit of Dutch insurer ING Groep N.V. (ING), as the dispute over a US$300 insurance claim Fabio Covarrubias, chairman of the fertilizer producer, said the suit against ING Comercial America sought to force Mexico's top casualty insurer to cover damages related to unpaid insurance claims that would have prevented Fertinal from falling into bankruptcy. Fertinal has conducted extensive litigation against the ING unit in an effort to collect up to $300 million in disputed claims after a hurricane destroyed Fertinal's phosphate mine in September 2001, just as ING completed its takeover of the Mexican insurer. A state judge froze all of the accounts of ING Comercial America and issued warrants against 21 company executives on grounds that they falsified policies to limit the company's liability and enhance its own claim with reinsurers. ING Comercial America said damage at the phosphate mine destroyed by hurricane Juliette was assessed at $13 million and that it attempted to deposit a $10 million advance.

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Practices of impunity that damage investor confidence are still common


• The treatment of international bondholders in a default situation is the ultimate test of the downside risk for investors. Primary investors need the “vultures” so that they can exit positions in defaulted debt.

• Concurso mercantil is clearly a major improvement over the old Mexican reorganization/bankruptcy statutes, but it still has major flaws from the perspective of an international investor. AHMSA, while operating in suspension de pagos for the past 13 years, has had several years when it generated over US$500 million of EBITDA, against a total debt on which it defaulted of US$1.8 billion.

• A bankruptcy/reorganization code can have one of four main biases: toward the government, to the estate (the company as a going concern), to creditors, or to controlling shareholders. Chapter 11 in the US is biased toward the estate. In our experience, concurso mercantil is biased towards the interests of controlling shareholders who, in the absence of good faith, can still act with impunity.

• Large corporate restructurings through the 2000s had all been accomplished on a consensual basis between bondholders and controlling shareholders. In all cases but one, Satmex – where the main shareholder was US company Loral, itself in bankruptcy – controlling shareholders maintained control while bondholders provided concession in various forms., but at least there was a “fair” agreement.

• Inconsistencies in the application of concurso mercantil (some examples)• Demet - the judge denies on a technicality that the company is eligible for an involuntary concurso• Mexicana - in which the judge did not make progress and was only replaced two years later, by which

time the competition was able to capitalize in many ways, including an IPO• Iusacell – different treatment of two issues of second lien notes was approved by the judge• Durango – Company lent its own cash to insiders to buy bonds at a huge discount after announcing

default; IFECOM appoints a former board member as conciliadora38

Uncomfortable history with corporate bankruptcy in Mexico


• Vitro is the first large Mexican company to exploit the loophole and use intercompany payables to approve a restructuring plan over the objections of the US$1.45 billion of debt of legitimate creditors. Durango had previously threatened this but eventually reached a consensual deal.

• Many elements of the case are of note: the US$1.9 billion of payables were incurred long after the default, an outside party provided financing in a transaction viewed by many as fraudulent conveyance, the company is attempting to invalidate operating company guarantees, and the final plan put forward by the conciliador is extremely punitive to creditors who do not consent to the terms.

• On December 6, 2011, Vitro announced it debt restructuring plan received support from holders of 74% of its debt and that the conciliador had submitted the plan to the Mexican judge; with US$1.45 billion of third party debt and US$1.9 billion of intercompany payables, this suggests that only 40% of legitimate creditors voted in favor of the plan.

• JP Morgan recently valued the plan as giving consenting senior creditors an NPV recovery of 45-50% of original face, and even less for non-consenting creditors.

• This summer, a US bankruptcy judge denied Vitro Chapter 15 protection for its plan in the US as he deemed the plan violated US policy.

• There are policy issues for Mexico due to this case: investors require a yield premium to hold Mexican high yield bonds (the “Vitro premium”) and, more importantly, Mexican high yield issuers have been largely shut out of the market (since May 2010, there have been no first-time high yield issuers out of Mexican, in comparison with 18 from Brazil). It will also be harder for companies under stress to get relief, and we saw that Cemex had to insert a “Vitro protection” covenant to get its restructuring done.

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Deficient bankruptcy regime: Vitro


Mr. Rauch is a Partner and Portfolio Manager at Gramercy, an investment fund with US$ 3.3 billion assets under management specializing in corporate and sovereign investments in global emerging markets. He serves as co-portfolio manager for Gramercy’s distressed debt strategies and for funds invested in non-performing mortgage loan portfolios, is a member of the Investment Committee, and is on the board of Pendulum, a Mexican loan servicing agent in Mexico. He has been, or is currently involved, as a leading creditor or advisor in the restructuring of numerous companies across the emerging markets including Accel, Alestra, Arpeni, Asia Pulp and Paper, BTA Bank Kazakhstan, Dina, Durango, Essar Steel, IndustriasUnidas, Iusacell, Mechala, Medefin, Metrogas, San Luis, Satmex, SIDEK, Synkro, Transtel, and Tristan Oil. Prior to joining Gramercy at the end of 2000, Mr. Rauch worked as a consultant to hedge funds managed by Van Eck Global and Farallon Capital Management, specializing in the analysis of emerging markets special situations. From 1994 to 1999, Mr. Rauch was President of The Weston Group, where he was responsible for overseeing the firm’s securities research and corporate debt advisory business in Latin America. In the early 1990s, Mr. Rauch worked as a Vice President with Lehman Brothers and CS First Boston in their emerging markets fixed income trading groups. In the second half of the 1980s, he was a Vice President and trader with First Interstate Bank’s loan syndications group, structuring and syndicating loan facilities to highly-leveraged American and Asian corporations. In 1980, he began his career with Swiss Bank Corporation in several credit and corporate finance roles. Mr. Rauch received a BA in Political Economy at Williams College and an MM in Finance and International Business at Northwestern University – Kellogg Graduate School of Management.

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Biography of Robert L. Rauch, Partner, Portfolio Manager, Gramercy

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