Latin America : Mexico Resumes Its Debt-for-Equity Swaps

Mexico resumed its debt-for-equity swap program Friday, after a hiatus of more than two years.

Regulations governing the long-expected program were announced in the Diario Oficial, a government publication that lists new laws and regulations.

Under the program, a total of $3.5 billion in Mexican debt is expected to be exchanged over the next two years for ownership in public works projects or in companies the government wants to sell. The owners of public works projects will be allowed to charge tolls to recover their costs and a profit.

The advantage for investors is that while Mexican debt is selling for 40 cents on the dollar, the Mexican government is willing to buy the debt back at up to 65 cents on the dollar. The result is a 25% discount on investments in the areas of the economy selected for swaps.

The deals will be based on sealed bids at auctions that will be announced in major Mexican and international newspapers. The date of the first auction has not been set.

It would work this way:

An investor who wants to finance a $6.5-million highway construction project would bid at the next auction, offering the government, say, a 35% discount on $10 million worth of debt. If the bid is accepted, the investor would buy the $10 million worth of Mexican debt for $4 million in U.S. dollars. Then he would sell the debt back to the government for pesos.

That would reduce the government’s debt by $10 million and give the investor the equivalent of $6.5 million in pesos, at the current exchange rate. Thus, the investor could build a $6.5-million highway for an investment of $4 million.

Resumption of the swap program was a condition of the renegotiated debt agreement that Mexico signed with foreign commercial banks in February.

The new arrangement will be substantially different from the swap program Mexico abruptly halted in November, 1987.

First, the new swaps will be open to all investors. The previous program was restricted to foreigners, which caused resentment among Mexican businessmen who felt that foreigners were being given an unfair advantage.

Second, the new program is aimed at promoting purchases of existing, state-owned companies. Previous swaps were aimed at encouraging new investment.

That change can be expected to minimize the inflationary impact of swaps. Previously, the government printed pesos to cover the cost of the debt being repurchased, fueling inflation.

No money will need to be printed for swaps used to buy assets in existing companies.

In addition, the program supports the government’s privatization program.