Two Argentine domestic ABS transactions from the same issuer were close to default last week. The deals in question are worth the equivalent of $11.1 and are backed by auto loans issued by Lujan Williams, a small financing company based in the province of Mendoza.
The company first securitized in 1997, when it launched a deal comprised of two tranches for a total of $5.7 million. In 1998 it issued two more tranches for $5.1million. The offerings received a triple-A rating from Thomson BankWatch of Argentina and Evaluadora Latinoamericana, a small local rating agency.
"Lujan Williams tried to take on as many roles as possible in these transactions in order to cut-back on the expenses of structuring the deal," explained a source familiar with the offerings. "They decided to be both issuer and trustee and did not designate a substitute administrator. This is a risky thing to do.
"The trustee should always be independent from the issuer and in the case of a small company with a very concentrated business such as Lujan, having a substitute administrator that could act in case of bankruptcy is key. Besides, the deals did not have any kind of reserve fund, neither for commingling nor for liquidity problems."
In 1999, Lujan Williams issued two more tranches for a total of approximately $6 million, also with triple-A ratings from the same agencies. At that time, a law demanding the designation of an independent trustee for securitization deals was in place and the company mandated ABN Amro as the deal's co-trustee. "By then, the market was more sophisticated," explained a source that worked on the deal. "The company got the message from investors regarding the importance of an independent trustee and made the changes."
But things turned sour at the end of May when the company declared bankruptcy. The first two tranche-deal, issued in 1997, had matured by then but interest payments were due for the remaining two deals issued in 1998 and 1999.
Some sources argue that the deals are technically in default, but other market players contend that it is too early to be sure. "Banco Regional de Cuyo, a Mendoza-based bank has been designated as a substitute administrator for the two tranches in which ABN Amro is the co-trustee," the source said. "This means that the auto loan payments are being directed to the trust. As long as this works, the deal would only experience temporary difficulties and there maybe slight delays, but to call it a default could be premature."
Fabian Pirrone, deputy director of capital markets at Sudameris Bank, which participated in all the offerings, agreed. "Not having a substitute administrator or a separate trustee in the first deals was undoubtedly a mistake," he explained. "But I think that things will be quickly resolved with the interference of Banco de Cuyo and ABN Amro. We received the payments that were due last week and are not worried about the future performance of the deal."
Despite seeing Argentina's first securitization to be so close to default, the local market registered barely a flutter. "It was a small deal which didn't involve a national bank or an international rating agency so it didn't have much weight on the structured market," said an investor. "At the end of the day, I think that what happened to the Lujan Williams transaction could provide a useful lesson for the market. They tried to cut on the costs of structuring the deals and ended paying a high price for it."