A post yesterday by Jason Lakin in the Harvard International Review suggests that the economic slowdown in the U.S., which will lead to a drop in remittances to Mexico by migrant workers, falling oil prices, which will put a dent in Pemex’s profits (on which the Mexican Government relies heavily to fund its operations), and the rapid decline in the peso vs. the dollar, which will dramatically increase the cost of Mexican imports, could reduce Mexico’s economic growth in the near term.

A new World Bank report credits Mexico for developing a future flow credit enhancement mechanism for municipal bonds without a federal government (sovereign) guaranty.  The innovation led to a sharp rise in municipal bond issuances in Mexico from 2001-2003.

The credit enhancement adopted by Mexican municipalities was inspired by Citibank’s securitization of Telmex telephone service receivables in 1987, which was the first major future flow securitization in a developing country.  That transaction involved securitizing telephone receivables owed to Telmex that arose when Telmex completed more calls for AT&T customers calling into Mexico than AT&T completed for Telmex customers calling into the United States.  According to the report, “Telmex sold the AT&T receivables to a U.S.-based trust and instructed AT&T to pay its Telmex invoices to that trust.  This arrangement isolated debt service payments to bondholders from any possibility of misdirection by company or government officials and guaranteed the bondholders first access to reliable cash flows.  That allowed Telmex securities to earn a higher credit rating than Mexico’s sovereign debt.”

To adapt the Citibank/Telmex future flows model to the municipal credit context, the municipality created a trust administered by an independent financial manager, which would receive tax-sharing payments (i.e., future flow receivables) to which the municipality was entitled from the federal government.  The financial manager could then make debt service payments to bondholders before any of the tax sharing grant funds were delivered to local officials and the bonds issued by the municipality or the trust itself could receive higher credit ratings that they would absent the credit enhancement.

Controladora Comercial Mexicana (MXK: COMERCIUBC) (frequently called La Comer in Mexico) filed a new petition for bankruptcy protection (concurso mercantil) under Mexican law after the court rejected its first petition, which was filed on October 9, 2008, according to a report in El Economista. 

The company said in the report that it is invoking its rights under the Mexico’s Business Reorganization Law (Ley de Concursos Mercantiles) and has therefore suspended the payment of all of its financial obligations. 

It is not clear why Comercial Mexicana’s original bankruptcy petition was rejected, but it is possible that the rejection was based on a technicality and that the court will accept the company’s new petition.  Article 20 of the Business Reorganization Law contains the specific requirements that a petition for bankruptcy protection must contain under the statute, which include, among other things, the audited financial statements of the petitioner for the three years preceding the filing of the petition, a list of creditors and debtors of the petitioner and their names and addresses, the maturities of all debts of the petitioner, and an inventory of all assets of the petitioner.

Gruma, S.A.B. (NYSE: GMK), the world’s leading flour manufacturer, affirmed today that its MX$2.8 billion (US$168 million) loss during the third quarter of 2008 was linked to losses on exchange rate derivative instruments, according to a report in El Economista. 

Gruma specified that the losses were caused by a 1,805% increase in the company’s cost of financing, which was “the result of unrealized losses on exchange rate derivative instruments representing a virtual fair market value loss of US$291 million.”  This loss sharply contrasts to Gruma’s profit of MX$799 million (US$76 million) for the third quarter of 2007. 

At the close of September 2008, the report said that Gruma’s total debt was US$772 million.  The company’s financial issues could have ripple effects world-wide: Gruma has 19,000 employees, 91 plants, and sells its products in 50 countries, including the U.S. Mexico, Venezuela, and Australia, as well as in Central America, Europe, and Asia.

Jeremy Schwartz’s Uncovering Mexico Blog has a nice post cataloging his foreign press corps visit with Carlos Slim, an excerpt of which is set forth below:

The talk, which perhaps naturally focused on the financial crisis gripping the U.S., was mostly pleasant, although Slim did get testy when pressed about his personal wealth and monopolistic practices. Here are some highlights:

—Slim urged more flexibility and creativity in dealing with homeowners facing foreclosure, suggesting temporary, interest-only loans as an alternative to seizing a home. “There need to be solutions…that aren’t total punishment,” he said.

—There was much curiosity about Slim’s recent purchase of 6.4 percent of the New York Times’ stock. Many of the ink-stained wretches wondered what Slim saw in newspapers at a time when the industry is suffering through its own crisis. Slim, much to our relief, argued that there will always be a need for quality content regardless of the packaging. “It’s an evolution,” he said of the newspaper business. “The ones that don’t evolve will disappear.”

—Slim took umbrage to any suggestion that his companies were bad for Mexico, lashing out at one reporter: “To think that in poor countries there shouldn’t be strong companies is perverse,” he said. “Why should foreign companies (be the only ones that prosper)…The ideal would be that there were more companies like this.”

—He also turned the tables when asked about monopolistic practices, complaining that Mexican regulators won’t let him run video over phone lines as part of a so-called Triple Play of cable, telephone and Internet service. On the other hand, cable and other phone companies have accused Telmex of charging outrageously high connection costs to hook up to its monolithic network, forcing many would-be fixed line providers out of the market.

Mexican retailer Coppel, S.A. de C.V. (MXK: ALMACO) and cement holding company Cemex, S.A.B. de C.V. (NYSE: CX) announced last week that they have placed short-term debt backed by government guarantees issued by Mexican development banks Bancomext (Banco Nacional de Comercio Exterior) and Nacional Financiera, according to a Guardian report.

The guarantees have enabled the companies to roll over commercial paper amid the turmoil in the credit markets. 

The report also said that Monterrey-based supermarket chain, Organizacion Soriana, S.A. de C.V. (MXK: SORIANB), had recently been downgraded by Moody’s on concerns it depends too much on commercial paper.  In addition to its Soriana and other branded multi-format stores, Soriana indirectly controls Gigante, S.A. de C.V., which operates 198 stores in Mexico and the U.S. under the Gigante, Bodega Gigange, and Super G brands.

Monterrey-based glassmaker Vitro, S.A. (NYSE: VTO) may be forced to file for bankruptcy protection (concurso mercantil) in Mexico because of derivative losses in natural gas, according to a Bloomberg report.

The report said that Vitro’s Binswanger Glass unit is the biggest glass-retailer in the U.S., with more than 100 stores in 22 states.

Add Mexican poultry, egg, and hog producer Industrias Bachoco, S.A.B. de C.V. (NYSE: IBA) and Monterrey-based Monterrey-based magnesium and steel alloy producer Compania Minera Autlan, S.A.B. de C.V. (MXK: AUTLANDB) to the list of major Mexican companies suffering significant losses from currency derivatives. 

Industrias Bachoco reported a US$50 million loss from currency derivatives and Minera Autlan posted a US$40 million for the cancellation of currency derivatives, according to a report in the October 15, 2008 edition of the International Herald Tribune. 

Expect more derivative-related losses to be disclosed by Mexican companies over the next few weeks.

Disclosure: I own a few Industrias Bachoco American Depositary Receipts.

Mexico’s National Bank and Securities Commission (Comision Nacional Bancaria y de Valores – CNBV) has opened an investigation of several undisclosed Mexican banks and investment banks relating to foreign-exchange derivatives they sold to Mexican corporations resulting in mark-to-market losses to those corporations in excess of US$2 billion, according to a report by Adam Thomson in the October 20, 2008 edition of the Financial Times. 

The report said that the investigation expands on an investigation commenced by the CNBV last week of the corporations that suffered the losses.  An excerpt from the report follows:

Just over a week ago, Comercial Mexicana, Mexico’s third-largest retailer, took the market by surprise when it declared bankruptcy after failing to meet a $400m loan payment. The company, which had hitherto reported strong growth, later admitted that it had accumulated more than $1bn (€743m, £578m) in debt from exchange-rate derivatives.

Since then, several Mexican companies have issued statements clarifying the extent of their exposure to exchange-rate derivatives.

Among them is Gruma, the corn flour and tortilla producer, whose mark-to-market losses stood at $684m on October 8 compared with just $291m a week before. Cemex, one of the world’s biggest cement producers, last week announced that its mark-to-market derivatives losses had topped $700m.

Mr Babatz said that his investigation would focus initially on two Mexican non-financial companies, though he said he could not provide names because of legal reasons.

He also clarified that the probe would only look at whether these companies had complied with their legal obligation to inform authorities and the market about their derivatives positions in a timely fashion.

Mr Babatz said it would be unlikely that the investigation could have legal consequences for any banks, but added that they would be called to account if they were found to be selling derivatives without sufficiently explaining the risks involved.

“We would be shutting our eyes if we didn’t think that the people who were selling these instruments should have known better,” he said. “These are not the standards that we want to see in our markets.”

He said the initial results would be known by the end of November, and could involve fines for companies and individuals of up to 5m pesos ($390,000, €292,000, £227,000) for each case of wrong-doing.

Mexico Law Blog believes that the mark-to-market derivative-related losses disclosed by Comerical Mexicana, Gruma, and Cemex may be the first of many such losses to be disclosed by significant Mexican companies.

Cash America International, Inc., the world’s largest pawnshop operator, announced on September 29, 2008 that it would spend US$90 million to purchase an 80% stake in the Mexican company that owns and operates the Prenda Facil (Easy Pawn) pawnshop chain in Mexico, according to a Bloomberg report.  The report said that Prenda Facil operates pawnshops in 16 Mexican states. 

The pawnshop business, which is probably older than prostitution, has been growing at a steady clip in Mexico over the last several years.  The growth is attributable to many factors, including the preference of many Mexicans not to use, or lack of access of many Mexicans to, traditional banks. 

In August 2007, EZCORP, Inc. announced its acquisition of the assets of 20 Mister Money Mexico pawnshops in Mexico from MMFS Intl., S.A. de C.V., a subsidiary of Mister Money Holdings, Inc., for approximately US$14 million.