Why Foreign Bankers Made Mexican Loan

SINCE 1982, foreign bankers have been unwilling to make new loans to privately owned Mexican companies. But last week, Banque Paribas, a French merchant bank, found the right structure for a syndicated loan to entice a host of foreign bankers to join it in providing $210 million in new funds to a Mexican copper producer, Mexicana de Cobre S.A. de C.V. (MdC), part of Grupo Mexico.

In a statement, Paribas said the favorable reaction of the banks to the loan ``shows their confidence in the steps that have been taken with respect to Mexico's foreign debt problem with the signing of an agreement between Mexico and the international banks.''

Paribas also said the economic reforms taking place in Mexico helped encourage the bankers.

``We think this could be a model for other LDC borrowers,'' says Bernard Allorent, chief executive officer of Paribas here, referring to less-developed countries.

The structure of the Paribas loan reduces the risk of nonpayment on the loans arising from the volatility of commodity prices and interest rates. It is backed by a contract for the sale of a third of the copper produced at the MdC ``La Caridad'' mine, the largest open-pit copper mine in Mexico. The buyer of the copper is SOGEM S.A., a part of Soci'et'e G'en'erale de Belgique and one of the largest metal traders in the world. Thirty-five percent of the loan will be made by banking subsidiaries of Soci'et'e G'en'erale.

The three-year loan involves a complex financial arrangement called a ``commodity price swap.'' Such arrangements take volatile commodities, such as oil, and find ways to assure prices remain stable by using the financial or commodity markets to hedge sales or purchases.

Thus, the amount MdC will receive for the sale of the copper is fixed over the length of the three-year loan, eliminating the volatility that affects the seller. However, in return for this protection MdC will not benefit from any rise in the price of copper on the commodity markets, notes Gaylen Byker, managing director of Paribas.

At the same time, the Mexican company will receive a loan with a fixed rate of interest. The proceeds from the copper sale will go into an offshore account that will be used to make payments on the loan - thus eliminating the risk that Mexico will block payments should it use exchange controls to manage its currency reserves.

The loan itself will allow MdC to refinance about $500 million in debt that was assumed when Grupo Mexico bought MdC from the government. Because of the deep discount for government loans, MdC will realize a loss of about $200 million when it sells the government loans in the marketplace. That loss will be financed by the new loan of $210 million. This will save them interest and principal as well as freeing up $300 million in cash.

None of the lending banks are based in the United States. Many American banks are reluctant to make new Latin loans because of uncertainty about tax, accounting, and regulatory issues.