Mexican HY Paper Finds U.S. Supporters

Mexican corporate issuers may soon have yet another selling point to U.S. high yield portfolio managers, sources said last week.

In the aftermath of Moody's Investors Service announcement earlier this month that it was reviewing Mexico's sovereign rating, U.S. investors are putting the corporate issues there under tighter scrutiny.

Mexico's sovereign debt is currently rated Ba1 by Moody's, the highest strata of the junk-bond world, and while international investors had been expecting an upgrade for some time, it is now happening quicker than many had anticipated.

Consequently, high yield buyers will be looking at the corporate investments as a way to "reach for a little more yield in a safer environment," said one buy side source familiar with Mexican corporates.

The cable and telecom firms likely will get most of the attention, as they have in the U.S. and European markets, she said. There has been a tightening across the board in those sectors of about 40 basis points to 70 basis points, and there is expected to be more tightening to come.

Specific names that were said to be possible benefactors included paper packaging company Grupo Industrial Durango, industrial issuer Vitro SA, and telecom plays Alestra SA and Nuevo Grupo Iusacell, sources said.

One U.S. portfolio manager said that her shop has seen a couple of its Mexican issues tighten by as much as 200 basis points since December, although she declined to name specific companies.

Another U.S. buysider, who agreed with the general sentiment, cautioned that the increased interest in Mexico is actually more of comeback than a new story. Two years ago, Mexican corporates were virtually considered high yield credits and they were routinely sold off of U.S. high yield desks, he said.

However, there is one difference between the renewed interest in Mexican corporates and previous bullish markets.

"This time there's more cross over mutual fund buyers who are buying to hold," said Tim Norman, a portfolio manager at the Phoenix-Goodwin High Yield Fund. "Before, it was the hedge funds that were pushing things."

Norman, who has been buying emerging market corporate issues since the mid-1990s, said he views Latin America, and specifically Mexico, as the best way to get into the proven sectors.

"If you like the telecom sector, you'll look for the cheapest way to play it," he said. "We've gone to Europe, and we're going to Latin America."

In the past two weeks, he has seen some bonds increase as much as six points in trading, he said.

The current situation is a bit of a Catch-22, however, because a shortage in supply is keeping secondary prices high. Norman said he's expecting an increase in new issues in the near term thanks to companies' capital needs and investment banks seeing a window of opportunity to underwrite deals. And while that will help broaden the market, it also will bring down bond prices.

"There's really not a lot of product to choose from... some telecoms and a few industrials," Norman said. He said he is expecting to see some new deals from Mexican corporates in the near future.

This is the actually the latest example of a trend in which Mexican corporates have been coming more into favor over the past year as the country began to decouple from other Latin American countries and became more closely linked to the U.S. economy (HYR 11/15/99).

As that happened, the debt from those companies, much of which has been high yield, has found its way into more and more cross-over portfolios in the U.S.

In fact, Mexican corporate deals, as a percentage of total issuance from the region, almost doubled in the past year, rising to 43% in 1999, from roughly 23% in 1998 and 1997, according to Thomson Financial Securities Data.

Dick Cryan, a portfolio manager at Evergreen Investments, who agreed that Mexico definitely will see increased interest, also cautioned that a lot of people lost a lot of money in 1998. And for those investors, a "five-B" deal may not be enough to entice them back into the market.