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Medium- and long-term financing: Corporate bond issues
(Country Finance Via Thomson Dialog NewsEdge)Mexicos corporate bond market has blossomed since 2001 and is now viewed as one of the strongest markets in Latin America. Mexican blue-chips have begun earning strong ratings from US agencies such as Standard & Poors. Improving profit margins, regional expansion and transparent corporate practices resulted in the high marks. Local giants such as Telefonos de Mexico (Telmex), the fixed-line telecommunications monopoly; Cementos Mexicanos, a major cement producer; and Petroleos Mexicanos, the state-owned oil and gas monopoly, now approach the market regularly, issuing a mix of dollar- and peso-denominated bonds.
The most popular products are debentures (obligaciones) and medium-term notes (MTNspagares de mediano plazo). They are flexible, denominated in either dollars or pesos, with either fixed or variable interest rates. Mexicos banking regulator, the National Banking and Securities Commission (Comision Nacional Bancaria y de ValoresCNBV), oversees the instruments. This offers issuers great flexibility. Interest rates may be fixed or variable, and the bonds may be indexed to the dollar or denominated in pesos or inflation-indexed units (UDIs). The instruments are often unsecured, although they may enjoy a guarantee from a parent company or the endorsement (aval) of a trust or credit institution.
Long-term notes and corporate bonds issued on the Mexican Stock Exchange (Bolsa) require an investment-grade rating from an agency (such as Standard & Poors or Moodys) and must be authorised by both the CNBV and the Bolsa. Investor interest, however, is only drawn to highly-rated issues. Extensive documentation is required for listing. Foreign companies do not face special restrictions on issuing in the local market, as long as they are constituted under Mexican law, but they have shown only minimal interest. There are no restrictions on foreign investors.
Debentures and MTNs differ in several important respects. Debentures have no minimum or maximum maturity; MTNs are restricted to between one and seven years. Investors also feel that covenants possible with debentures give them a better chance of a speedy judicial ruling in case of default. Debentures can be callable; MTNs cannot. The legal framework for both instruments is the Law of Credit Titles and Operations (Ley de Titulos y Operaciones de Credito). Rules guiding issues of MTNs are further set out in two CNBV circulars: 10-143 and 10-148.
The corporate bond market is becoming less elite, with creditworthy outsiders managing to participate. Homebuilding companies are marking this trend most notably. In all, about US$12bn in peso-denominated corporate debt was issued in 2005, according to government officials. That figure is up from about US$7.5bn in 2004. Still, many middle-tier firms will continue to depend on supplier credit for financing. Another barrier: issuing a corporate bond requires rigorous financial disclosure, which can mean prohibitive administrative costs for smaller companies.
Private pension-fund managers, flush with cash, will continue fuelling the market. Previously, pension funds were restricted to investing only in government paper or corporate debt issued by top-tier companies only. Now, with more investment flexibility, the funds have more options for placing their deposits. About 20% of pension funds portfolios are invested in corporate bonds, according to the Ministry of Finance and Public Credit. Insurance companies and annuity firms are also becoming more active participants in the corporate bond market.
The portfolios of afores must hold a minimum percentage of guaranteed real-return debt and cannot invest in issues rated below AA by S&P. The typical term for a corporate UDI bond issue has been seven years, with real rates in the 710% range.
Blue-chip firms, including Cementos Mexicanos, one of the worlds leading cement makers; Grupo Bimbo, Mexicos leading baked goods company; and America Movil, the leading mobile-telecommunications operator, continue to issue the most. Mortgage and housing companies are also active players. In September 2005 Homex, a home builder, sold US$250m in ten-year bonds that carried a coupon of 7.50%. Su Casita, a Mexican builder and mortgage lender, is also emerging as a steady issuer, along with first-time issuer Infraestructura y Construccion.
The Bolsas listing commissions vary according to the value of the issue. The fee for an issue of Ps40m is about Ps50,000, with a charge of 0.09% levied on any amount above that, to a maximum of Ps500,000. For issues with maturities under one year, a fee of Ps1,700 is paid on a Ps1m issue, plus 0.065% on the excess. The CNBV has its own fee structure.
Issues of convertible bonds or bonds with warrants are rare. Only financial institutions tend to issue convertible bonds.
Participation certificates are long-term instruments representing an interest in assets, instruments or rights held in a trust. Credit institutions issue the certificates at terms of 38 years, and they may be fully amortised at maturity or in prepayments. There are two types of participation certificates: real-estate participation certificates (certificados de participacion inmobiliarios) and ordinary participation certificates (certificados de participacion ordinarios), which are issued by non-real-estate trusts. Interest rates are usually based on a spread above government or bank debt instruments and are paid as coupons. These instruments are used to finance large construction projects, such as shopping centres, and quasi-structured projects, such as toll roads.
Before the recent revival, highly-rated companies had typically issued bonds in the international capital markets. Although the prevailing high real interest rates on peso credit still make dollar financing the best option for companies that can access it (such as exporters), the domestic market provides an option for second-tier companies or those that need to balance their books with pesos.
Tax consequences. Interest paid on corporate bonds is tax deductible if the funds raised are used for business purposes. Interest is deducted as accrued. Only net interest is considered for tax purposes.
If there is a discount on the security, the whole amount of the discount is treated as interest. There is a significant difference, though, in the time of recognition, as the income from the discount (including original issue discount and market discount) is taxed upon realisation and not upon accrual. In all other respects, the discount falls under the same treatment as interest.
There is a 15% withholding tax on the discount if the instrument is issued on a recognised market; a 4.9% levy applies if the recipient resides in a country with which Mexico has a double-taxation treaty.
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