Mexico's challenging economic landscape has significantly impeded structured finance issuance. However, the market still has significant potential, and there are growing opportunities in several sectors. S&P Global Ratings recently held a series of meetings with several market participants, including arrangers, bankers, and investors. Below we summarize some of the key takeaways and expectations from those discussions.
Various Avenues For Growth
Despite sluggish issuance volumes, there are several opportunities in the Mexican structured finance market:
- Demand for financing in the industrial, retail, and office sectors--coupled with a growing real estate market--is creating opportunities for CMBS (commercial mortgage-backed securities) transactions, primarily in the northern region.
- There's also potential for cross-border transactions, which encompass various financial assets, properties, future flows, remittances, etc. However, foreign exchange exposure and a potential sovereign rating ceiling could be roadblocks.
- Demand for data centers' data storage and processing capabilities has been growing globally, and Mexico is no exception, translating to an opportunity for structured finance transactions in that sector.
- Repackaged ABS securities are widely used in Latin America to finance mainly infrastructure and related projects. With the Mexican government's significant need for infrastructure funding, we believe repackaged securities are a potential alternative to tap the international markets.
Robust Performance Supports Credit Stability In The Sector
Mexico's structured finance market has performed solidly. Overall, the credit quality of our rated portfolio has consistently improved since the pandemic. That's been reflected in our ratings in this sector, which have generally remained stable. Notably, there's been only one default (from a legacy RMBS issuance) in the past three years, and over the past 12 months, we've raised more ratings than we've lowered.
Most Mexican structured finance transactions have performed in line with expectations, which has led to revised loss assumptions. This--combined with many deals entering their amortization periods and thus deleveraging--has enhanced these transactions' capacity to absorb losses, further strengthening their resilience.
Improved operational capabilities among originators translated into higher maximum potential ratings: Our operational risk assessments in Mexican ABS deals have improved. This reflects originators' generally strengthened internal controls and organizational structures, solid track records, and demonstrated ability to continue operating through an economic downturn, as was the case during COVID-19. These improvements have contributed to increased efficiency, transparency, and risk management within the structured finance market, further boosting investor confidence. On average, the maximum potential global-scale ratings are in the 'A' rating category for ABS and in the 'AA' category for RMBS. These caps don't apply to national-scale ratings.
Roadblocks To Growth Persist
Economic growth in Mexico remains sluggish despite the expectations that arose from nearshoring. Indeed, we recently revised our 2024 GDP growth forecast downward to 1.6% from 2.2%. Our economists cited weaker-than-expected growth in the first half of the year and lower private-sector confidence due to a series of government reforms.
Uncertainty surrounding the economic and political environment--combined with a stressed non-bank financial sector--has led to cautiousness among investors, resulting in decreased issuance. High interest rates in recent years have also posed challenges for the market. It's worth noting, however, that the Mexican central bank has begun to cut interest rates, with the reference rate currently at 10.5%. We expect the rates to decrease gradually, with projected rates of about 10% by the end of 2024 and 7.5% by 2025.
Despite the challenges, the Mexican structured finance market has remained resilient, with underlying pools having stable performance in line with our expectations and credit stability. In addition, these pools have proven effective in isolating the securitized assets from the originators' risk.
New issuance volume remains at historical lows. Mexico's structured finance issuance has faced challenges and undergone significant shifts in recent years. In 2022 and 2023, new issuance volume totaled roughly US$500 million, and this year appears to be much the same. These volumes are nearly a 60% drop relative to issuance in the two years preceding the pandemic. We attribute this decline to a combination of economic uncertainties and cautious investor sentiment dampening market activity.
Despite the challenges for non-bank financial entities, ABS equipment deals have been the most common asset class over the past five years. This resilience demonstrates the enduring demand for these assets and the class's ability to weather challenging times.
There've been no new RMBS (residential mortgage-backed securities) deals since 2021. This can be mainly attributed to the lack of issuance from government entities. Another impediment has been Mexico's solidly capitalized banking system; its access to funding is primarily through deposits, thereby reducing banks' appetite to securitize their portfolios. Nevertheless, we continue to believe that capital management needs could trigger the use of structured finance issuances.
Related Research
- Economic Outlook Emerging Markets Q4 2024: Lower Interest Rates Help As Pockets Of Risk Rise, Sept. 24, 2024
- Latin America Structured Finance Surveillance Chart Book: August 2024, Aug. 21, 2024
- Credit FAQ: Mexico's New Administration Faces Lagging Economic Growth And Weaknesses In Public Finances, June 3, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Antonio Zellek, CFA, Mexico City + 52 55 5081 4484; antonio.zellek@spglobal.com |
| Jose Coballasi, Mexico City + 52 55 5081 4414; jose.coballasi@spglobal.com |
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