Mexicana (inglés)

We consider how a Mexican mining company engineered off-shore dollar financing in the face of high segmentation barriers.  Such barriers reflected a combination of country risk,  exchange risk and credit risk at a time when Mexican firms had- for all practical purposes-been banished from the international financial market.  

In July 1989, Banque Paribas acting as an agent for a syndicate of international banks, advanced $210 million to Mexicana de Cobre,  S.A.  (Mexcobre), the then recently privatized Mexican copper producer. The interest rate was 11,5% (three-year LIBOR plus 3%)  for 36 months,  which was considerably lower than the 20%  plus interest rate Mexcobre carried on its existing debt.  

The key to this innovative financing deal was the combination of 2 commodity swap combined with a long-term sales contract under which SOGEM,  a European copper buyer,  agreed to buy 4,000 metric tons(or one third) of Mexcobre's copper output every month.  Because SOGEM paid for the copper with dollars and made payment into Paribas'  New York-based escrow account,  this arrangement effectively eliminated both the risk of devaluations of the Mexican peso(exchange risk) and the possibility that the Mexican central bank would not make dollars available to repay the loan(country risk). The role of the copper swap, as we discuss below, was to reduce Mexcobre's credit risk by shielding the company from the effect of a drop copper prices.

Like other commodities swaps, a copper swap is essentially a series of long-dated forward copper contracts. In this case, it worked as follows: each month SOGEM paid the prevailing market price for 4,000 tons of copper set on the London Metals Exchange (LME)  into Paribas escrow account.  If the LME price for copper fell below $2,000 per metric ton,  Paribas paid the difference into Mexcobre's escrow account,  thus effectively ensuring that Mexcobrehad sufficient dollars (4,000 x 52,000 $8 million)  to meet its monthly $8 million principal and interest payments. If the price went above $2,000, Paribas reduced the escrow account by the difference.  (To hedge its own resulting exposure, Paribas in turn entered into a mirror-image swap transaction directly and indirectly with a group of European copper traders, processors, and users.)

Through this series of transactions,  Mexcobre and its lenders were assured that,  provided the company shipped 4,000 tons per month(again,  only 1/3 its total output)  for three years,  the entire $210 million lent by the bank syndicate would be repaid monthly installments of S8 million.  By structuring the deal in this way, Mexcobre was able to circumvent capital market barriers then facing Mexican firms and gain access to considerably cheaper dollar financing.

...