Mexico to Hold Fire Sale of Loans, Assets

Like anyone planning a garage sale, Oscar Medina Mora is a bit nervous. But just consider what the Mexican official is trying to clean out: thousands of homes, scores of businesses, golf courses, art, an executive jet--and about $40 billion in loans, many of them past due.

The sale items come from Mexican banks, which were clobbered by the economic recession of 1995-96. Medina Mora will start auctioning them off this Wednesday, launching the biggest such liquidation since the U.S. savings and loan debacle a decade ago.

“There are no minimum prices,” declared the Stanford-educated former banker, who heads a government agency known as Asset Valuation and Sale, or VVA, which is roughly equivalent to the now-defunct U.S. Resolution Trust Corp.

“We want to show our commitment to sell,” he said.

Wednesday’s auction is the first in a series that could go on for seven years. Medina Mora is eager to get it off to a good start.

The sale is important not only for the cash it will raise. Bankers and officials hope it will help modernize Mexico’s financial system by establishing a method for selling off loans to investors, thus freeing up banks to lend more to credit-starved Mexicans.

“That’s the biggest benefit of this,” said Victor Herrera, chief bank analyst for the Standard & Poor’s rating agency in Mexico. “In the future . . . there will be a secondary market to provide liquidity to the banks, creating access to loans for more people and more companies.”

The property and loans up for grabs come from failed banks that authorities took over, as well as existing banks that sold their bad loans to the government under a $30-billion bailout program. The proceeds of the auction will repay the government.

In its auctions, the VVA plans to offer a dazzling collection of real estate: 3,328 plots of land, 70 office buildings, several golf courses and the luxury 18-hotel Camino Real chain.

But unlike the U.S. savings and loan sale, real estate is only a small part of the picture. Mostly, the Mexicans will be auctioning off business loans, some of them years overdue.

“There’s some stuff that will sell for 90 cents on the dollar. Other stuff is not worth 10 cents on the dollar. There’s such a huge spectrum of assets,” said Kevin Hulbert, vice president of Dallas-based Lincoln Property Co., a real estate firm.

Foreign buyers are crucial to the process, since so much is being sold off. Lincoln Property, Los Angeles-based Colony Capital and GE Capital Corp. are interested in bidding. Other firms that picked up bargains in the U.S. savings and loan sale may join them.

But Mexico’s auction is expected to be much trickier than the U.S. sell-off.

In part, that’s because the Mexican bankruptcy and foreclosure process tends to be drawn out and difficult.

“The last thing I want to do is enter the Mexican legal process to foreclose on someone here. It’s not a well-defined process,” said Hulbert, who is based in Mexico City.

There also is a problem of information. Unaccustomed to selling off their loans, some Mexican banks kept limited records, in haphazard fashion. Medina Mora has attempted to get banks to send him computer diskettes. But he recalls one institution simply delivering 50 pounds of documents on a few loans it had made.

“The boxes measured 2 meters,” he said, shaking his head.

Finally, there is the question of the loans themselves. There are all sorts of lemons among the $22 billion in loans that troubled banks off-loaded through Mexico’s bailout. More than half are past due.

“If the asset is good, the information is good and the documentation is good, we hope for a good price,” Medino Mora said. “But if one of these is missing, the price will drop.”

Wednesday’s sale is considered crucial to setting the tone for the rest of the auction. Buyers will be offered a $19-million package of three dozen good-quality loans made to companies ranging from a shoe factory to an auto distributor.

So far, 26 companies have signed up to bid, most of them Mexican banks, according to press reports. At least five must participate for the sale to be valid.

Investors and officials will be carefully watching the auction because it will help establish prices. With no secondary market in which to sell their past-due loans--currently about 13% of Mexican banks’ outstanding loans--many banks don’t know what they’re worth.

“This will be very helpful in looking at the value of banks and trying to establish the cost of the bad loans they still have on their books,” said Susana Ornelas, a bank analyst at Deutsche Morgan Grenfell.

Meanwhile, companies such as Colony Capital figure to do some business.

In the U.S. savings and loan sale, said Colony principal Robert Stelzl, his firm initially expected to foreclose on property guaranteeing the nonperforming loans it purchased.

“The actual results were vastly different,” he said, noting that his company was able to work out payments with borrowers. “I wouldn’t be surprised if it was the same” in Mexico.

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On the Block

Here’s a rundown on real estate being sold off by Mexico’s government to help resolve the nation’s banking crisis:

Plots of land: 3,328

Houses: 2,761

Commercial businesses: 1,139

Industrial businesses: 192

Farms: 102

Office buildings: 70

Other real estate: 118

Source: Mexico Asset Valuation and Sale