Mexico's Government Bonds to Be Sold in U.S.
By Marla Dickerson, By Marla Dickerson Times Staff Writer

http://www.latimes.com/business/la-fi-m ... s-business

MEXICO CITY — Mexico this month will become the first foreign nation to sell small-denomination government bonds in the United States aimed at mom-and-pop investors, the Mexican Finance Ministry said Friday.

Starting Feb. 13, investors in the U.S. will be able to purchase the Mexican bonds in denominations of $1,000 from a network of brokerage firms including Charles Schwab, Merrill Lynch and Morgan Stanley. The bonds will be available in various maturities, ranging from about three years to 10 years.

The Mexican securities have been given investment-grade ratings by three major credit-rating firms, with Moody's Investors Service giving the bonds a rating of Baa1, and Standard & Poor's and Fitch Ratings a BBB. But those ratings are at the low end of investment grade.

For investors willing to stomach the risk, the Mexican bonds are expected to pay annual interest rates of 0.7 to 1 percentage point above what U.S. Treasury bonds of similar maturities pay.

The U.S. retail market offers a new segment of investors for Mexico to tap and a chance to capitalize on its hard-won financial stability.

"We are able to reach out all the way down to the individual investor" with this program, said Gerardo Rodriguez, the Mexican government's deputy undersecretary for public credit.

But some money managers said Mexico probably would have a lot of work to do to convince small investors that their investments would be safe.

U.S. Treasuries are seen as the ultimate blue-chip investment, with the full faith and backing of the U.S. government.

In addition, when many American investors think of Mexico, "they think of the currency crisis" of 1994 and 1995, when Mexico sharply devalued its peso, resulting in huge losses for owners of peso-denominated securities, said Bill Hornbarger, fixed-income strategist with A.G. Edwards & Sons Inc. in St. Louis. "It is going to be a hurdle."

Still, since the peso crisis, Mexico has reduced its debt load, trimmed its budget deficit, brought inflation in check and stabilized the peso, lifting the country's debt ratings back to investment grade.

The bond sale "would have been impossible 10 years ago," said Bret Rosen, assistant vice president of Los Angeles-based Trust Co. of the West, which manages assets worth $5 billion in Latin America and other emerging markets. "It shows how far Mexico has advanced."

Although Mexico's retail bonds will be denominated in dollars, the securities still will carry an inherent currency risk, said Christian Stracke, emerging markets analyst with CreditSights. That's because the main source of repayment of these bonds is tax money that the Mexican government collects from its citizens in pesos.

"So the worst-case scenario is that Mexico is scrambling to find dollars, it can't find them and it can't pay you," he said. "It's very unlikely that's going to happen. But it's more likely to happen to Mexico than it is to Wal-Mart."

Rodriguez said Mexico was aiming to sell about $1.5 billion of bonds to U.S. retail investors over the next few years. That's a drop in the bucket compared with the nation's total external debt, which New York-based CreditSights calculates at about $72 billion.

Chicago-based Incapital and Banc of America Securities are lead managers and agents of Mexico's new bond program. Incapital, founded in 2000, is one of the nation's leading underwriters of retail corporate bonds.

Individual investors in the U.S. hold about $120 billion of corporate retail bonds issued by companies as varied as DaimlerChrysler and National Rural Utilities Cooperative Finance Corp., said Tom Ricketts, chief executive of Incapital. He said his clients had asked for government issues to further diversify their portfolios. That led Incapital to talk to the Mexican government about testing the retail market.