Pawnshop Unit Joins World’s Richest Man With Sale: Mexico Credit

By Brendan Case and Boris Korby

April 2 (Bloomberg) — Payroll lender Prestaciones Finmart SAPI is joining Carlos Slim, the world’s richest man, in selling bonds internationally that allow investors to profit from the world’s best-performing major currency.

Prestaciones Finmart, majority-owned by Austin, Texas-based pawnshop operator EZCORP Inc., plans to sell 750 million peso-linked ($60.7 million) three-year bonds, according to a person familiar with the sale. In the past two years, only Slim’s America Movil SAB and state-owned Petroleos Mexicanos, rated as many as eight levels higher than Finmart’s B+ grade from Fitch Ratings, have sold similar securities. Yields on America Movil’s notes due in 2022 have fallen 0.73 percentage point since they
were issued in December to 5.72 percent.

The peso has gained 4 percent against the dollar this year, the most among the world’s 16 major currencies, on speculation President Enrique Pena Nieto will overhaul tax and energy policies to propel growth in Latin America’s second-biggest economy. Demand for peso bonds issued overseas is likely to grow as declining yields on dollar-denominated debt prompt foreign investors to take on more risk, according to Silva Capital Management LLC. Average yields on emerging-market corporate bonds have tumbled 0.7 percentage point in the past year to 4.93 percent.

“There could be investors who are interested because it gives them currency exposure and lets them participate in the Mexico growth story,” Alejandro Urbina, who helps oversee about $800 million in emerging-market assets at Silva Capital, said in a telephone interview from Chicago. “What it does for the corporates is it expands the universe of potential investors for them and therefore increases the availability of capital.”

Payroll Loans

Javier Creel Moreno, chairman and executive president of Mexico City-based Prestaciones Finmart, and EZCORP spokesman Rick Bluntzer declined to comment on their financing plans.

Espirito Santo Investment Bank is arranging the transaction, said the person, who asked not to be identified because terms aren’t set.

Prestaciones Finmart provides payroll loans primarily to employees of Mexican government agencies, payable in installments that are deducted from customers’ wages. Loan
amounts range from 2,000 pesos to 100,000 pesos and average 16,000 pesos. Former U.S. Ambassador to Mexico Antonio Garza and Luis Tellez, chief executive officer of the Mexican stock exchange, sit on the lender’s board.

State Employees

Prestaciones Finmart’s Crediamigo operation has agreements covering 170 employers and 3.5 million employees, according to EZCORP. The Mexican Social Security Institute for State Workers, known as the ISSSTE, handles withholding on about 25 percent of its business while the Public Education Ministry accounts for 20 percent, according to an offering circular for the Finmart bond sale obtained by Bloomberg.

The company had a credit portfolio of 1.28 billion pesos as of Dec. 31, up 78 percent from two years earlier. Net income was 72.9 million pesos last year, compared with a loss of 90 million pesos in 2011.

Investors are turning to higher-yielding local-currency debt from emerging-market companies to bolster returns amid near-zero rates in the U.S., according to Eduardo Cortes, who helps manage $1.4 billion in debt at GIA Partners LLC.

“This all falls into a broader category of investors going to emerging markets, where you can pick up higher interest rates than are available in Japan, Europe, the U.S.,” Cortes said in a telephone interview from New York. “You can get exposure outside of the dollar as well, which is what a lot of investors
are looking for.”

‘Reputational Risks’

Fitch Ratings assigned a B+ ranking to Prestaciones Finmart on March 11, four levels below investment grade and eight steps less than America Movil’s A rating.

The rating reflects “its favorable business model granting loans to stable public sector employees with direct debit to their payrolls,” Alejandro Garcia, a Fitch analyst, said in the report. It takes into account “relatively high operational, political and reputational risks associated with this sector, as well as the exposure to fierce competition and the potential for rapidly changing market dynamics.”

While past-due loans almost tripled last year to 56.9 million pesos, the increase came off an “exceptionally” low level and was partly due to attempts to be more proactive in
measuring bad credit, Garcia said in a telephone interview from Monterrey, Mexico.

Teachers in the state of Puebla filed complaints last year with state prosecutors alleging that money was deducted from their pay by Crediamigo without having asked for a loan, according to La Jornada de Oriente newspaper and Diario Como newspaper. The company denied the allegations in a statement.

Prestaciones Finmart’s Creel Moreno declined to comment on the complaints.

Market ‘Froth’

On Jan. 19, 2012, EZCORP announced an agreement to buy a 60 percent stake in Prestaciones Finmart for $38.7 million in cash and possible additional amounts if the company achieves certain performance targets. Under the terms of the deal, EZCORP also agreed to inject an additional $12 million into the company alongside $8 million from minority shareholders. EZCORP also owns the Empeno Facil chain of Mexican pawnshops.

While America Movil’s notes are denominated and payable in pesos, Prestaciones Finmart’a bond payments will be determined in the local currency and converted by a foreign-exchange agent into dollars two days before payment and settled in U.S. currency.

Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole’s Miami brokerage, says Prestaciones Finmart’s offering may be a sign of “froth” in the market and that more peso gains will be limited after the Mexican central bank cut its benchmark interest rate by 0.5 percentage point to a record-low 4 percent on March 8.

Yield Spread

“The Mexican peso is still an attractive play but it’s kind of a crowded trade at this point,” he said. “Mexico recently cut rates, so it’s less attractive.”

The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries climbed one basis point, or 0.01 percentage point, to 183 basis points yesterday, according to JPMorgan.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose one basis point to 98 basis points, according to data compiled by Bloomberg.
Yields on Mexican interbank rate futures contracts due in December, known as TIIE, were unchanged at 4.38 percent yesterday.

The peso weakened 0.3 percent to 12.3642 per dollar.

Pemex Sale

Prestaciones Finmart is selling bonds 16 months after Pemex, as the state-controlled oil producer is known, sold 10 billion of notes linked to the peso to yield 7.65 percent. The
securities now yield 5.68 percent.

“As often happens, these markets are blazed by the big guys,” GIA Partners’ Cortes said. “A lot of these non-U.S. capital markets, pesos and other countries that are not traditional in the investment community, are going to expand over time. There’s plenty of demand.”

Posted in Spring 2013.