Since mid-1989, Mexico has gradually regained access to voluntary international capital market financing after having been virtually excluded for much of the decade. The renewed acceptability of Mexican securities among international investors has been accompanied by a notable improvement in interest rates and maturities. In the event, Mexico has been at the forefront of the process of re-entry by developing countries into the international capital markets.
Mexico’s return to capital market financing followed the sustained implementation of a far-reaching program of macroeconomic adjustment and structural reforms, accompanied by a comprehensive restructuring of existing indebtedness, which served to address “debt-overhang” concerns. This process is of considerable significance both for Mexico and for other potential market re-entrants in their attempt to overcome the credit rationing that characterized most of the 1980s.
This section focuses on private sector portfolio flows, which have been the main vehicle of re-entry. The first part presents the various instruments used by Mexican entities in their efforts to raise capital abroad. The second analyzes the factors that facilitated re-entry. The concluding part discusses the macroeconomic implications of this process and highlights some of the policy implications.
Instruments and Markets Used in the Re-Entry Process
Mexico’s re-entry process has been characterized by a marked shift in the range of financing instruments used by Mexican entities to raise funds abroad. In contrast with the late 1970s and early 1980s, when the bulk of foreign financing was in the form of syndicated bank loans, Mexican borrowers, since mid-1989, have raised capital abroad in significant amounts using a progressively broader range of negotiable instruments, including bonds, Euro-certificates of deposit (Euro-CDs), Euro-commercial paper (Euro-CPs), and equities. This has helped Mexico broaden its financing base, adopt more flexible financing strategies, and avoid saturating individual markets.
Bond Issues
So far, spontaneous market financing for Mexico has taken predominantly the form of bond issues. Since the placement of the landmark June 1989 Bancomext issue (see below), a large number of bond issues has been placed on progressively better terms. Between June 1989 and December 1991, Mexican borrowers raised the equivalent of $6.2 billion in international bond markets through 50 issues; of this amount, the public sector (including the Government) issued the equivalent of $4.1 billion while private entities raised about $2.1 billion.
Mexican bond issues rose from $100 million during the first semester of 1989 to the equivalent of $1.7 billion a semester in 1991. As both the value and the number of issues increased, the range of markets and investor pools tapped by Mexican borrowers was also diversified. While the U.S. dollar segment of the market (both Euro-markets and the U.S. domestic private placement market, including under Rule 144A)1 remained the main source of funds, Mexican public sector entities have successfully raised funds in the deutsche mark, Austrian schilling, ECU, peseta, Canadian dollar, and pound sterling segments of the market.
Financing costs have declined over time, with a lower yield premium above “risk-free” paper reflecting the increased acceptance of Mexican securities by international investors. When the re-entry process began in June 1989 with a $100 million five-year note issue by Bancomext—the first unsecured voluntary public sector issue by a Mexican borrower since 1982—the combination of a 10.25 percent coupon and a steep launch discount pushed the initial yield-to-maturity to 17 percent, some 820 basis points over the yield on comparable maturity U.S. Treasury bonds.
Subsequently, yields on Mexican bond issues, both by public and private sector entities, have fallen sharply. Yield spreads over risk-free paper have narrowed in the primary market from an average of 800 basis points on unenhanced paper (i.e., unsecured or without convertibility options) during the second half of 1989 to 329 basis points during the second half of 1991. The yield spread on unenhanced public sector paper narrowed from 820 basis points in 1989 to 261 basis points during the second half of 1991, while for private sector borrowers it declined from 800 basis points in 1989 to 482 basis points during the second half of 1991 (Table 9). In line with the improvement observed in the primary markets, the yield spread over U.S. Treasury bonds implied by reported movements in secondary market prices of publicly traded bonds has declined to less than 250 basis points for several issues by public sector borrowers (Chart 16).
Characteristics of Bonds Issued by Mexican Entities, June 1989–December 1991
Bond issues not involving collateralization or convertibility options.
Characteristics of Bonds Issued by Mexican Entities, June 1989–December 1991
| 1989 | 1990 | 1991 | ||||||
|---|---|---|---|---|---|---|---|---|
| Semester | Semester | Semester | ||||||
| 1st | 2nd | 1st | 2nd | 1st | 2nd | |||
| Yield spread (in basis points) | 820 | 483 | 448 | 401 | 281 | 298 | ||
| Of which: unenhanced issues1 | 820 | 800 | 602 | 377 | 345 | 329 | ||
| Maturity (in years) | 2.5 | 3.5 | 3.5 | 4.3 | 4.3 | 5.2 | ||
| Of which: unenhanced issues1 | 2.5 | 2.0 | 5.0 | 4.2 | 4.0 | 5.4 | ||
| Public sector | ||||||||
| Yield spread (in basis points) | 820 | 165 | 306 | 322 | 261 | 232 | ||
| Of which: unenhanced issues1 | 820 | … | 348 | 349 | 261 | 261 | ||
| Maturity (in years) | 2.5 | 5.0 | 4.7 | 4.4 | 3.6 | 5.7 | ||
| Of which: unenhanced issues1 | 2.5 | … | 5.0 | 4.4 | 3.6 | 6.1 | ||
| Private sector | ||||||||
| Yield spread (in basis points) | … | 800 | 660 | 560 | 305 | 429 | ||
| Of which: unenhanced issues1 | … | 800 | 760 | 570 | 555 | 482 | ||
| Maturity (in years) | … | 2.0 | 1.6 | 4.0 | 5.3 | 4.0 | ||
| Of which: unenhanced issues1 | … | 2.0 | 2.0 | 3.0 | 5.0 | 3.8 | ||
Bond issues not involving collateralization or convertibility options.
Characteristics of Bonds Issued by Mexican Entities, June 1989–December 1991
| 1989 | 1990 | 1991 | ||||||
|---|---|---|---|---|---|---|---|---|
| Semester | Semester | Semester | ||||||
| 1st | 2nd | 1st | 2nd | 1st | 2nd | |||
| Yield spread (in basis points) | 820 | 483 | 448 | 401 | 281 | 298 | ||
| Of which: unenhanced issues1 | 820 | 800 | 602 | 377 | 345 | 329 | ||
| Maturity (in years) | 2.5 | 3.5 | 3.5 | 4.3 | 4.3 | 5.2 | ||
| Of which: unenhanced issues1 | 2.5 | 2.0 | 5.0 | 4.2 | 4.0 | 5.4 | ||
| Public sector | ||||||||
| Yield spread (in basis points) | 820 | 165 | 306 | 322 | 261 | 232 | ||
| Of which: unenhanced issues1 | 820 | … | 348 | 349 | 261 | 261 | ||
| Maturity (in years) | 2.5 | 5.0 | 4.7 | 4.4 | 3.6 | 5.7 | ||
| Of which: unenhanced issues1 | 2.5 | … | 5.0 | 4.4 | 3.6 | 6.1 | ||
| Private sector | ||||||||
| Yield spread (in basis points) | … | 800 | 660 | 560 | 305 | 429 | ||
| Of which: unenhanced issues1 | … | 800 | 760 | 570 | 555 | 482 | ||
| Maturity (in years) | … | 2.0 | 1.6 | 4.0 | 5.3 | 4.0 | ||
| Of which: unenhanced issues1 | … | 2.0 | 2.0 | 3.0 | 5.0 | 3.8 | ||
Bond issues not involving collateralization or convertibility options.
A gradual lengthening in the average maturity of bonds has also been observed, although maturities on issues by Mexican borrowers remained in the short-term range (five years or less) during most of the 1989–91 period. The landmark Bancomext issue, which marked the initiation of the re-entry process in June 1989, had an effective average maturity of two and a half years. In contrast, in successive issues since September 1991, Mexican borrowers have set benchmarks for the longest dated deal from Latin American issuers since 1982. In September 1991, Pemex, the state-owned oil company, successfully tapped the U.S. dollar segment of the market with a seven-year bond; this was followed by the placement of ten-year bonds by Nafinsa in October and by Pemex in November. These issues by Nafinsa and Pemex were particularly important in that they established a complete yield curve for Mexican credit, which constitutes an important benchmark for future bond issues for borrowers from the region. More generally, the average maturity lengthened from about 3 years in 1989 to 5.2 years during the second half of 1991 (see Table 9).
The bond issues to date have been mainly on behalf of entities with established international reputations and, in general, a strong export base. Their placement was facilitated in the initial re-entry phase by the use of enhancements, including collateralization techniques, bond-equity conversion facilities, and early redemption options (“puts”).2 Various kinds of assets have been pledged as collateral, including foreign exchange receivables generated abroad, assets located abroad, and Mexican mortgages.3 During June 1989-December 1991, public sector borrowers used collateralization techniques in 7 out of 32 issues, while private sector companies enhanced their debt instruments in 9 out of 18 issues. From June 1989 through December 1990, collateral backed offerings accounted for about 58 percent of total Mexican bond placements. In contrast, Mexican borrowers—particularly public sector entities—reduced significantly their reliance on such techniques in 1991.
In their effort to diversify the range of borrowing options, Mexican entities have also established several Euro-medium-term note (EMTN) programs. Bancomext set up the first EMTN facility for a Latin American borrower in April 1991, and Cemex, a large cement producer, became the first private Latin American company to tap the EMTN market in September 1991, in the context of a $250 million program. In December 1991, Banca Serfin became the third Mexican issuer in the EMTN market with a $250 million program featuring multicurrency options and allowing for paper maturities from one year to five years. Several other institutions are reported to be establishing EMTN programs for significant amounts, which would give Mexico increased flexibility in approaching the markets, including with respect to the currency denomination and the maturity of the notes that may be issued.
Finally, Mexican borrowers have made increasing use of equity-linked debt instruments. During the second quarter of 1991, Cemex launched the first ever convertible issue by a Mexican entity in the Euro-markets and opened a potentially promising segment of the market for Mexican private companies.4 Also, Tamsa (Tubos de Acero de México) successfully placed a $50 million convertible, and Apasco (Mexico’s second largest cement company) issued convertible subordinated debentures for $50 million. In December 1991, Nafinsa placed an innovative five-year bond with detachable warrants linked to the Mexican Stock Exchange index. This was the first index-linked debt transaction for a Latin American borrower.
Short-Term Debt Instruments
Mexican borrowers have also been at the forefront of the entry of Latin American entities into the markets for short-term notes. These instruments have consisted of Euro-certificates of deposit (Euro-CDs) since April 1990 and Euro-commercial paper (Euro-CPs) since April 1991.
Since Banca Serfin made its first public Euro-CDs issue in April 1990, Mexican commercial banks have raised large amounts of capital through the placement of U.S. dollar-denominated short-term instruments through their London and, to a lesser extent, New York and Cayman Island branches.5 These resources have accounted for a significant proportion of the net private capital inflows received by Mexican banks in 1990 and 1991. At mid-April 1992, an estimated $12 billion of Mexican Euro-CDs was outstanding. In a departure from earlier issuance patterns, reflecting growing acceptance worldwide of Mexican issues, the recently privatized Bancomex issued Euro-yen CDs through its London branch in November 1991.
In line with the developments observed in the Eurobond markets, the yield to maturity on Euro-CDs issued by Mexican commercial banks has declined substantially. In the initial phase (early 1990), six-month Euro-CDs were sold at yields of between 15 percent and 16.5 percent; however, by the end of 1991, yields for newly issued six-month Euro-CDs had fallen to an average of 8.6 percent (Chart 17).6 The investor base for such short-term instruments has widened steadily through the period and by mid-1991 reportedly embraced a number of European investment houses, London branches of U.S. banks, private banking units of commercial banks, fixed in come funds, and European and Latin American money managers.
Mexican Bank Euro-Certificates of Deposit
(In percent)
Source: Lazard Fréres; Financial Times.Mexican Bank Euro-Certificates of Deposit
(In percent)
Source: Lazard Fréres; Financial Times.Mexican Bank Euro-Certificates of Deposit
(In percent)
Source: Lazard Fréres; Financial Times.For its sheer magnitude and the risks assumed by Mexican commercial banks in the process, the surge in issuance of Euro-CDs has been a cause of concern. In August 1991, the Mexican authorities imposed liquidity requirements against funds raised in foreign currencies, including through Euro-CD offerings. Commercial banks were also requested to match the currencies and the maturity of their foreign currency-denominated short-term assets and liabilities to limit their risk exposure. These measures are expected to reduce the profitability of raising funds abroad through issuance of Euro-CDs, curtailing sharply additional commercial bank short-term indebtedness abroad. Market observers consider that the measures may lead to a wider use of Euro-commercial paper by Mexican corporations, which would reinforce the trend toward disintermediation of the banks already evident since April 1991.
Mexican companies began raising capital directly through the issuance of Euro-commercial paper prior to the imposition of the new liquidity requirements.7 After Hylsa, a private sector steel company, had arranged the first Euro-CP program for a Mexican company in April 1991, five other companies (Aeroméxico, CEMEX, Grupo DESC, TAMSA, and TMM) established Euro-CP programs with financial intermediaries in 1991, raising some $400 million. Other established Mexican corporations are expected to tap the Euro-CP market in the period ahead since interest rates on Mexican peso-denominated CPs are still higher than those on Euro-CPs with a similar maturity, after taking into account the preannounced devaluation of the peso against the U.S. dollar.
Equity and Equity Derivatives
Renewed access to the international equity markets is another important feature of Mexico’s return to international capital markets. International share offerings, and more generally equity financing, have surged during the last two years and have accounted for a significant share of voluntary financial flows to Mexico. Also, as equity prices have continued to increase and investment is on the rise, in part as a result of the envisaged Free Trade Agreement with the United States and Canada, Mexican companies are expected to make greater use of equity markets as a source of financing and to launch a steady stream of international equity issues in the near term.
Equity financing in Mexico has taken several forms, including the foreign purchase of shares in Mexican corporations either directly in the Mexican stock market and through Mexican corporate equity issues in industrial country stock markets (including through ADRs), or indirectly through country funds that specialize in investing in the Mexican stock market.
The value of foreign equity holdings has risen from under $1 billion at the end of 1989 to $18.5 billion by the end of December 1991—reflecting both new inflows and the strong appreciation of share prices in the Mexican Stock Exchange. Also, 17 equity offerings that featured an international tranche have allowed Mexican corporations, including Telmex, to raise abroad the equivalent of some $3.6 billion between April and December 1991. While Vitro’s offering was the first Mexican international equity deal done under Rule 144A (see below), Telmex represents a landmark as it was one of the largest international equity offerings ever ($2.2 billion), the first global equity offering for a Latin American corporation since the early 1980s, and the first time a developing country sold equity in a public utility through the international capital markets.8 The Telmex offering is seen to have opened new market segments and to have facilitated subsequent equity and bond placements by Mexican companies.
Most equity offerings have involved the use of ADRs, highlighting the important role these instruments can play in facilitating the placement of shares abroad by companies in developing countries. In 1990, the number of Mexican companies with ADRs in circulation increased from 3 (Telmex, Tamsa, and Cifra B) to 8 with new issues by Interceramica, San Luis, Sidek, EPN, and Tolmex (a subsidiary of Cemex). Several additional ADR placements occurred during 1991, most of which were marketed through private placements in the United States under Rule 144A. In addition, in July, Grupo Gigante, Mexico’s second largest supermarket chain, became the first Mexican company to make an initial public offering with an international tranche. At the end of December 1991, balances invested in ADRs amounted to $13.7 billion (74 percent of total foreign equity portfolio investment in Mexico), up from $2.1 billion at the end of 1990.9
Factors Facilitating Re-Entry
A number of interrelated factors have contributed to the process of re-entry to voluntary capital market financing described above. Besides structural features, such as Mexico’s political stability and the fact that Mexico has a number of well-known high quality companies with potential for productive investments, the restoration of Mexico’s credit worthiness through the sustained implementation of adjustment policies and the removal of “debt overhang” concerns through the comprehensive restructuring package with commercial banks have been the key to regaining access to voluntary financing. In addition, the re-entry strategy adopted by the authorities has facilitated the re-entry process, while several “favorable” external factors have helped in gaining access to voluntary financing through the issuance of negotiable instruments.
Macroeconomic Stabilization and Comprehensive Debt Restructuring
Mexico’s recent re-entry experience has shown that re-establishing credibility with foreign investors hinges critically on the sustained implementation of appropriate adjustment policies and the ensuing macroeconomic stabilization (see Section II). Fiscal consolidation, a strengthened international reserves position, market-oriented structural reforms (including trade reform and the prospective North American Free Trade Area), and a credible exchange rate policy have contributed to re-establish confidence in the country’s macroeconomic environment.
Mexico’s renewed access to voluntary market financing is also associated with the removal of “debt-overhang” concerns that was achieved through the innovative debt- and debt-service reduction package with commercial banks. This helped to alleviate private sector concerns about country transfer risk and improved the prospects for non-debt-creating inflows. The comprehensiveness of the 1989 debt package convinced international investors that the operation was a once-and-for-all deal, and that thereafter the country would be in a position to meet all scheduled debt-service obligations on newly contracted debt. The debt- and debt-service reduction package was followed very rapidly by a sharp reduction in risk premiums and by significant inflows of foreign direct and portfolio investment, including repatriation of flight capital.
Mexico’s re-entry has been facilitated by the fact that the country has generally been perceived to have acted responsibly concerning the servicing of its external debt and by the realization that Mexico had kept an excellent record in the securities market for interest and principal payments throughout the debt crisis. This has contributed to the significant shift in financing instruments observed during the last three years, as bonds, rather than syndicated bank loans, have been the avenue for regaining access to international capital markets.
Re-Entry Strategy
Re-entry has also been facilitated by the authorities’ management of the process. Since its initial stages, the process of re-entry and broadening of Mexico’s foreign financing base has been monitored carefully. In order to avoid saturating the market with Mexican paper, the authorities carefully phased the successive bond issues by the public sector and limited the amounts placed, even in the face of reported oversubscriptions in a number of cases. The strategy was essentially to avoid forcing the re-entry, and instead to exploit perceived opportunities.10
The public sector played a leading role in lowering the benchmark borrowing terms for Mexican borrowers, including private sector entities, and it is accepted generally that the private sector has benefited from the leadership of the public sector in this regard. In the aftermath of the debt crisis, the public sector generously priced its first bond issues to attract investors’ attention and overcome the image Mexico had within the investor community. As discussed above, the launch yield of the June 1989 Bancomext bonds was close to 17 percent, implying a yield spread of some 820 basis points. This issue was launched during the negotiations with commercial banks, without collateral, and with no benchmark. In addition to the high yield spread, the bonds were of short maturity (2.5 years) and modest in size. The first four unenhanced issues by the public sector were for an average of $83 million only.
Subsequently, public sector bond issues were priced at progressively lower yield spreads over “risk-free” paper rates, while the investor base being tapped was broadened. Also, as discussed above, the maturity of the bond issues has been increased gradually with a view to establishing a complete yield curve (i.e., from one to ten years) for Mexican debt instruments. This was achieved with the issuance of two ten-year bonds in October and November 1991 by Nafinsa and Pemex, respectively.
The public sector also played a leading role in opening new markets, and tapping new investor pools.11 As noted above, the deutsche mark, Austrian schilling, ECU, peseta, Canadian dollar, and pound sterling segments of the market were successfully tapped at progressively better terms. In particular, the three issues by the UMS were seen as important benchmarks and helped other Mexican borrowers to regain access to capital markets on more favorable terms. Finally, the authorities have also authorized placement of foreign currency-denominated bonds with Mexican investors. The April 1991 issue by Bancomext was simultaneously placed in Mexico and in the international capital market.
Part of the re-entry strategy was the acceptance by the authorities that enhancement of debt instruments by the public sector may be required in the initial stages of the re-entry process. Enhancements such as collaterals, put options, and equity conversion rights (in the case of private sector entities) were seen as means to improve the marketability of debt instruments and to reduce risk premiums through overcoming extreme initial perceptions of counterparty credit and transfer risks. The use of collateral relaxed the rationing facing Mexican borrowers and in some cases may have paved the way for future access by promoting familiarity with new borrowers under conditions of reduced risks. It is estimated that the use of collateralization techniques has lowered borrowing costs by between 100 to 200 basis points.
Collateralization techniques, if used indiscriminately and for an unduly long period, have the potential, how-ever, of fundamentally impairing rather than improving a country’s ability to borrow on an unsecured basis over the medium term. Mindful of such risks, Mexican public sector borrowers have reduced the frequency of collateralized borrowing. As discussed above, public sector borrowers used collateralization techniques in two instances only in 1991.
Other Developments
A number of favorable external factors have helped Mexico’s renewed access to voluntary financing through the international capital markets. Among these are changing strategies by international investors (including Latin American investors), regulatory changes abroad, and the rating of Mexico by a credit rating agency.
The gradual widening of the investor pool has resulted from several developments. Investors went through an “education process” and became more familiar with Mexican instruments. The investor pool (mainly flight capital) initially was composed largely of private investors attracted by high yields.12 More recently, U.S. and European retail and institutional investors have been increasingly involved, with strong institutional participation being reported for most recent issues. This reflects institutional investors’ demand for cross-border diversification of risks, the ratcheting down of U.S. Treasury yields, which has inclined international investors to seek higher yield quality paper, and the weakness of the U.S. market for high-yielding corporate debt (“junk bonds”), which has led to U.S. funds being diverted abroad. Also, investors have been more receptive to Mexican paper as secondary market activity has been developed to enhance the liquidity of the instruments.
Regulatory changes abroad also have played a positive role in helping Mexico regain access to certain segments of the international capital market. The attractiveness of bond and equity issues as a vehicle for Mexican borrowers has been enhanced by recent regulatory changes designed to reduce transaction costs and improve liquidity. First, the approval of “Regulation S” and “Rule 144A” by the U.S. authorities in April 199013 has created significant new opportunities in the U.S. capital markets for Mexican issuers that may have been unwilling to meet the disclosure and other requirements of the federal securities laws applicable to offerings in the United States. Second, recent developments in Spain and Japan may facilitate Mexican borrowers’ access to the domestic bond markets of those countries. Already, the decision by the Spanish authorities to permit the United Mexican States to issue bonds in the Matador market in July 1991 allowed the first issue of noninvestment grade paper in that market. In June 1991, the Japanese authorities lowered the minimum bond rating required for an issuer to make a placement on the Samurai market from A to BBB in the case of sovereign (or sovereign-guaranteed) borrowers. This opens new possibilities for a number of developing countries, including Mexican borrowers.
In June 1990, the Mexican stock market (BMV) was granted the status of an “Offshore Designated Securities Market” by the Japanese financial authorities. This allows Japanese brokerage houses to deal with securities listed in the BMV. A similar agreement was reached in February 1991 when the British International Stock Exchange permitted operations in Mexican securities in the London market, while the U.S. Securities and Exchange Commission (SEC) granted the BMV the status of “Offshore Designated Securities Market” for the purpose of Regulation S.14 Indeval, the centralized depository institution, has been recognized by the U.S. Securities and Exchange Commission and the office of the Comptroller of the Currency as a qualified foreign custodian. Furthermore, Mexican brokerage firms have been allowed to open foreign subsidiaries, trade eligible Mexican securities abroad, and participate in international arbitrage operations.
Finally, the establishment of a formal rating by a credit rating agency may have reinforced interest among international investors. In December 1990, Moody’s Investors Service assigned Mexico a sovereign ceiling rating of Ba2—a below-investment-grade rating—and rated the bonds issued in the context of the debt- and debt-service reduction package (also known as the “Brady” bonds) Ba3. Since then, the agency has rated several Mexican Eurobonds Ba2.15 Continued pursuit of appropriate macro-economic and structural policies opens the way to eventual attainment of investment grade status. Although the market seems to have disregarded the rating assigned by Moody’s and allowed Mexican borrowers to raise resources at terms more favorable than would be implied by the Ba2 rating, attainment of a formal investment grade rating would, ceteris paribus, open to Mexican borrowers new segments of the market and would reduce Mexico’s borrowing costs.
Conclusion
Mexico’s re-entry into the international capital market demonstrates the feasibility of a debt strategy aimed at restoring access to spontaneous capital flows in the context of a strong economic program supported by the international financial community. Moreover, this process has set an important precedent for other developing countries.
Together with the reduction in debt-service obligations implied by the comprehensive restructuring of the commercial bank debt, this has been reflected in a sharp improvement in the capital account of the balance of payments and has allowed a positive net resource transfer. Correspondingly, access to international financial flows on improving terms has helped fund investment projects in Mexico that would bolster Mexico’s international competitiveness and external viability over the medium term.
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See pp. 68–69 for a discussion of Rule 144A.
Put options allow the holder to resell (put), at his discretion, the bond to the borrower at specified times for a prespecified price. Conversion rights provide for conversion into equity in the borrowing enterprise at a prespecified price. For further details on these enhancement techniques, see International Monetary Fund (1991). The rationale for using enhancements and their costs and benefits are discussed below.
More specifically, these deals involved the collateralization of future long distance receivables on AT&T by Telmex, credit card receivables by commercial banks, deposits with commercial banks abroad, and the future energy sales to Californian utilities by the Comisión Federal de Electricidad.
Investors in the Cemex convertibles will have the option to convert part of the semi-annual coupon and principal payments into shares of the Cemex-controlled Tolmex common stock represented by American depository receipts (ADRs).
These interest-bearing CDs are negotiable instruments in bearer form, cleared through Euroclear.
This compares with a 4.1 percent level on LIBOR U.S. dollar rates in December 1991; in the second quarter of 1990, LIBOR on six-month U.S. dollar deposits averaged 8.6 percent. The issuance of Euro-CDs was profitable even in early 1990 owing to the large spread between U.S. dollar and peso interest rates, given the credibility of the preannounced devaluation rate. Mexican banks used the proceeds to buy peso instruments or to on-lend the funds to corporate customers.
These Euro-CPs are typically issued and paid through a commercial bank in London. Available information suggests that these short-term notes are structured as zero-coupon bonds (i.e., are issued at a discount), are denominated in U.S. dollars, have a maturity of between one day and one year, and have been placed both in the Euromarkets and on a private placement basis. Mexican Euro-CPs are registered with the Special Section of the Mexican National Registry of Securities and Brokers. The interest is normally subject to a 15 percent Mexican withholding tax, but the Euro-CPs are sold to investors free of any withholding taxes.
A simultaneous offering of Telmex was carried out in the United States, the United Kingdom, Japan, France, Switzerland, Germany, Canada, and other countries.
In addition to owning stocks through ADRs and country funds (which account for some $0.5-0.6 billion), foreign investors also hold a significant portion of Mexican equities directly, normally through the purchase of nonvoting shares. Foreign purchase of voting shares are permitted in cases where there are no nonvoting shares, but they must be held in trust in the Neutral Fund administered by Nafinsa, the state-owned development bank. Since the creation of the Neutral Fund in late 1989, shares held in trust form rose to $1.3 billion at the end of December 1991.
In the context of this gradualist move, the three landmark issues by the United Mexican States (UMS) in the deutsche mark, the peseta, and the pound sterling markets were for a limited amount (equivalent to some $270 million). On each occasion, the authorities made it clear that the UMS had returned to the market essentially to establish a benchmark for the Mexican private sector.
The three recent UMS issues were placed at tight yield spreads over risk-free paper in three different sectors of the Euromarket. The February 1991 UMS issue in deutsche mark carried a yield spread of 190 basis points over German Government securities of comparable maturity. The second issue, denominated in pesetas and placed in July 1991 in the Matador market with a five-year maturity carried an initial yield of 175 basis points over the yield on corresponding Spanish Government bonds. Finally, the UMS tapped the pound sterling sector with a seven-year issue at 227 basis points over the comparable gilt.
Indications are that initial demand for Mexican debt and equity instruments placed internationally came, to a large extent, from Latin American, including Mexican, investors who had invested offshore. Since mid-1989, international capital markets have played an important role in the flight capital repatriation process that has helped improve Mexico’s capital account.
Regulation S facilitates the marketing of Euro-securities in the United States by clarifying registration requirements; Rule 144A relaxes the waiting period requirement for secondary market trading in privately placed securities.
As a result of this regulatory action, the securities of Mexican companies registered in the BMV may now be placed in the U.S. market without prior registration with U.S. authorities and may be resold in the BMV by the U.S. investors who purchased them.
For developing countries, Moody’s Investors Service issues ratings in accordance with a “sovereign ceiling rule,” whereby no bond issuer can be rated above the sovereign rating given to the country in which it operates.
