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Shadow banking in Mexico rewards falling buyers

(Bloomberg) – Debt investors who took an interest in Mexico’s shadow banking when a storm threatened to ruin the industry are beginning to reap the benefits.

The bonds of Financiera Independencia SAB de CV have recovered all their losses since the crisis began in mid-April, while the debt of Operadora de Servicios Mega SA de CV has returned almost to levels prior to this. Both bonds have returned at least 2% this month, beating an average loss of 0.6% among their corporate peers.

After non-bank lenders Alpha Holding SA and Crédito Real SAB de CV reported problems with their portfolio, stocks tumbled, causing repercussions throughout the industry. Now, with the dust settling, investors who bought on the downside are enjoying some of the best returns in the Mexican bond market. Even AlphaCredit, as the lender is known, has cut its losses, although its note remains deep in hardship levels.

“I think we saw the worst,” said Omar Zeolla, an analyst at New York-based Oppenheimer & Co., of Financiera Independencia and Mega. “They recovered better than other loans in the sector because there is more confidence in them.”

Financiera Independencia’s bonds maturing in 2024 are trading at 89.81 cents on the dollar, compared to the low of 82.88 cents on April 22. Mega bonds due in 2025 have recovered to 98.12 cents from 94.35 during the same period.

Risk of contagion

This is not a negligible industry for Mexico. According to data from the central bank, lenders grant more loans than traditional national banks.

So when AlphaCredit and Crédito Real reported inconsistencies in their credit portfolios within days of each other, forcing both companies to modify their earnings statements, the entire sector was affected. AlphaCredit’s bonds immediately fell back to worrying levels, below 40 cents on the dollar. Credito Real bonds have remained above that, but are among the worst performing in Mexico this month, falling 9.5%.

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Should the bad news continue for the lightly regulated sector, the contagion-driven sell-off could be renewed, warned Zeolla of Oppenheimer & Co. But for now, investors are celebrating the recovery of parts of the industry.

Coverage ratio

Financiera Independencia is benefiting from the transformation it underwent during the pandemic, when it freed up cash by selling its payroll and group loan businesses. That sale left the company “with a much more comfortable leverage position than the rest of the finance companies,” said Alejandro Peniche, an analyst at S&P Global Ratings in Mexico City.

Investors are also paying more attention to coverage ratios, the buffer that companies reserve for credit losses divided by the amount of their past due portfolio, to judge the risk of future shocks.

Once again, Financiera Independencia appears to be in good shape, its coverage ratio practically doubled to 216% in the first quarter of 2021 from the previous year, indicating that it has reserves to cover all of its bad loans more than twice. .

“We are very clear that the lifeblood of our company is funding,” said the executive director, Eduardo Messmacher Henríquez, in an interview. “If we give the funders a bad surprise, our company ends.”

Strong regulation

Mega CEO Ignacio González indicated that his company is prepared for greater volatility in the future, but that the company is confident in the transparency of its disclosures to the banking regulator. Its coverage ratio is 95.9%.

An AlphaCredit spokesperson declined to comment. Representatives for Crédito Real did not respond to an email requesting comment.

Still, there is a lot of risk in bond prices after the recent rally. Mega bonds due 2025 have a yield of almost 8.6% and Financiera Independencia notes due 2024 yield almost 11.6%, compared to 11.8% for Credito Real notes , all of which are among the highest yields on Mexican corporate debt.

With President Andrés Manuel López Obrador’s constant cuts to the industry regulator’s budget and the introduction of salary caps for regulators, investors are more reliant on what companies choose to report to their creditors.

“I am not ruling out that there is a surprise that they are worse than we imagined,” said Edgar Cruz, chief credit analyst at BBVA in Mexico City. “Now it will be up to investors to classify these companies into which ones are going to recover quickly and which ones will not.”

TIIE swap rates showed an advance this week, even after significant setbacks on Thursday, with the curve steepening to the downside. Ten-year swaps soared 23 basis points, compared to 10 basis points in gains over a year. On Thursday, Banxico voted unanimously to keep rates stable at 4%.

Next week, all eyes will be on Mexico’s retail sales figures, which have posted 12 consecutive months of year-on-year declines. The country will also report international reserves.

WHAT TO SEE:

May 18: international reserves May 20: survey of Citibanamex economists May 21: retail sales

SALE OF BONDS:

Fibra MTY will sell up to US $ 115M in dollar bonds on May 20 Vanrenta will sell MXN400M in local bonds on May 25 CFE will sell MXN10,000M in local bonds on May 18 Ferromex will sell MXN5,000M in local bonds in May Grupo Bimbo requests a debt quota of MXN20,000M

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