Banco Hipotecario (BHN), the biggest issuer of mortgage-backed securities in Argentina, is expected to launch its fourth MBS transaction next week through its BHN 4 Mortgage Trust Series 1999-1 securitization vehicle.

The deal, agented by Warburg Dillon Read, is expected to be $150 million. BHN had initially planned to launch a $300 million offering in June 1998, but delayed pricing following volatility in the bond market.

In contrast with BHN's three earlier international deals with Credit Suisse First Boston and two local securitizations with Deutsche Securities, the upcoming transaction features an insurance policy for currency inconvertibility from a subsidiary of Zurich American Insurance Co.

As one of the biggest issuers in Argentina behind the government, BHN has good reason to be watching the sovereign and the qualms regarding the continuation of the currency convertibility policy.

"Convertibility in Argentina the way we see it is not secure," said Jose Luis Daza, head of emerging markets research, J.P. Morgan & Co., Inc. "If Argentina does nothing to reform its fiscal policies and its labor market we feel that convertibility is going to blow up."

Based on the inconvertibility insurance, Moody's Investors Service gave the BHN transaction an A-1 international credit rating, while Fitch IBCA Inc. assigned an equally high A-plus international rating. Standard & Poor's Rating Group did not rate the transaction on the global rating scale, however it did assign a rating for the senior class on the national Argentine scale rating which translates to a double-B-plus/triple-B-minus on the global scale.

Maureen Coen, head of Latin ABS at Moody's, could not comment on the BHN transaction until it becomes public but did explain the company's credit rating rationale for similar deals. "As long as the risks associated with the sovereign - which is mainly inconvertibility - are enhanced, we don't see a problem with rating a structured transaction above the sovereign," she said. "We also analyze the risks associated with the macroeconomic environment in our stress scenarios."

The BHN offering marks the first time that Moody's rated a transaction involving assets generated in the Argentine market. Judging by the reaction of some market players, it was a controversial debut.

"All of BHN's previous international deals were rated in the triple-B level, so I was really taken aback when, suddenly an inconvertibility insurance pushed the rating so much above the sovereign ceiling," one source said.

Others were quick to agree: "This is a very aggressive rating," said a person familiar with Latin American securitization. "It implies that this MBS deal is stronger than any other debt in the country. I can almost guarantee that the deal will not be priced as an A-plus transaction. The rating is simply not credible."

Many felt that the inconvertibility insurance, which protects against the risk of transferring dollars to the offshore trust but not against a currency devaluation, does not address other important issues that could affect the transaction, namely the political and economic uncertainties surrounding presidential elections in October, which could directly affect mortgage payments.

"The same credit rating company (Moody's) that gave the BHN transaction an A-level credit rating is placing Argentina's sovereign rating on credit watch for possible downgrade because of what might happen after the elections," said a source. "I question why they did not take those worries into account when they rated this transaction."

Still, the offering has many strong points. Key among them is the strength of the issuer. "The transaction has a 20% level of subordination, and 30% of the transaction is guaranteed by BHN's own 24 branches and its network of 40 banks (which have deposits in Argentina's Central Bank)," explains Javier Merighi, analyst with Fitch IBCA in Buenos Aires. "In addition, the transaction was subjected to stress-case scenarios that are the highest in history before we assigned a credit rating. It is a very strong structure."

Moody's expects to be rating other MBS transactions in the near future. "The MBS market seems to be gaining popularity throughout Latin America," Coen said. "We have received calls from a variety of institutions asking us to rate their projects, so we expect to be involved in some deals soon."

As for the controversy surrounding BHN's credit rating, sources agreed that the market's reaction will be the one to end the debate.

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