With economic growth in Argentina having surpassed 8% last year and unemployment diminishing, it is no wonder the country's consumer ABS sector boomed in 2010. Collateral, after all, was in generous supply as more optimistic consumers made purchases on credit. This year, observers said we should expect more of the same, although the pace of economic expansion is projected to be closer to half of last year's figure. Concern about rising delinquencies is moderate for now, and there's none of the bubble anxiety beginning to infect neighboring Brazil.
But there are a couple of wrinkles.
Inflation, for one, could turn from being a friend of consumer ABS - it now incites Argentines to buy durable goods as a hedge - to its enemy if purchasing power should fail to keep up. Also, on the servicing side, while recent challenges have ended up supporting true sale, they have also highlighted the risks inherent in certain kinds of originators.
A sharp downturn occasioned by the global economic crisis tamped down economic growth officially to 0.9% in 2009 - although some experts argue that it was closer to -2%, disputing the government's by-now notoriously unreliable macro-figures.
What is inarguable is that origination in a variety of asset classes during 2008-2009 fell (see graph 1, above), while delinquencies climbed. In the kinds of consumer debt that is securitized, 90-day delinquencies peaked at around 16% during the worst of 2008, then fell to 10% in 2009, and further still in 2010. A rosier economic backdrop combined with better origination policies have compressed delinquencies down to the healthy levels seen in 2006, in the ballpark of 5%, according to sources.
Argentina turned around rather quickly in part because overall indebtedness was nowhere near the levels seen in developed countries and the economy was only a few years from its epic collapse in 2002. Expansive policies were instrumental as well.
"In 2007, everyone was prepared for a much worse crisis," said Enrique Algorta, director of INTL Capital in Buenos Aires. "In reality, we didn't have much of a credit crisis."
The giddy economic rebound in 2010, combined with rapid inflation and falling unemployment, pushed consumers of all socioeconomic stripes to buy and take on credit to do so. Originators were likewise in the mood to issue debt.
Consumer and personal loan transactions totaled Ps6 billion ($1.5 billion) in 2010, leaping 60% in nominal terms from 2009. The market in general was buoyant (see graph 2). Even taking inflation into account, growth was healthy. While issuance might not rise quite as briskly this year, January was fairly active, especially since it is the Austral summer. Placements of consumer and personal loan ABS totaled Ps423 million over the month (see table), according to data from INTL Capital.
Consumer and personal loans in Argentina tend to be very short term, and payments are often calculated as monthly installments - this even holds true for certan types of credit card debt. Originators that are most apt to securitize their portfolios are chains that sell household appliances or companies that sell credit cards, said Fabian Pirrone, manager of capital markets and investment banking at Banco Patagonia, a leading arranger and trustee.
Due to abundant liquidity, banks typically do not bother with securitization. There are, however, exceptions, such as Standard Bank, which has issued a couple of loan ABS.
The customers of the securitization-avid retail stores tend to be those that are outside the banking system. While annualized rates are running around 60% for many of these sorts of loans - which is less exorbitant than it sounds given that inflation is widely estimated at about 25% - whether this is reasonable does not necessarily enter into a consumer's decision. "This type of borrower isn't interested in the rate," said Mauro Chiarini, senior director at Fitch Ratings. "Their decision is based on whether they can pay the installment."
Inflation: Buddy or Bogeyman?
But everyone in Argentina knows that in the decision to take on consumer debt, 25% inflation matters. It is considered one of the highest in the world, and the government's number - close to 10% - has little credibility. With prices rising this fast, those who cannot afford more significant hedges like real estate are buying cars and appliances to protect themselves.
"Inflation at these elevated levels in Argentina spurs consumers to consume more than they would during periods of price stability," said Pirrone. "In this situation, if you buy a consumer good, which generally moves in price with inflation, then you generally protect yourself from inflation and the resulting deterioration in your purchasing power."
And using debt to fund those purchases can make just as much economic sense, especially if you're a consumer who expects your wages to stay ahead of general price increases, as they have in the past year or so.
"Inflation works in favor of consumer debt," Algorta said.
But if salaries fail to keep up with inflation, collateral is likely to suffer. Inflation could weaken Argentine borrowers and nudge up delinquencies, especially if it zips past wage growth, as pointed out in a recent report from Moody's Investors Service penned by Vice President Martin Fernandez and Senior Vice President Maria Muller.
Performance this year, nonetheless, is protected by a number of factors, the agency said.
Among them are high levels of subordination. Senior tranches, which Moody's generally rates 'Aaa.ar' on its national scale or 'Ba2'-'Ba1' on its global one, are cushioned with subordination of 15-20%. In addition, the subordination gets fattened up over the course of a performing deal, thanks to a turbo sequential payment structure that captures all the excess spread.
And the excess spread itself normally ranges between 30% and 50%.
The fact that the ratio of cash loans to consumer loans has gone up is also a strength, according to Fitch. "Historically, cash loans, which borrowers may use for any purpose, tend to have higher losses than consumer loans, which are used to purchase a specific item, such as a home appliance," the agency said in a report.
All of this amounts to plenty of buffer, even with the unpredictability of breakneck inflation.
In all, "the outlook this year continues to be favorable for those companies related to consumption, and as a result we expect that the volumes of securitization will keep increasing," said Pirrone.
This is despite the fact that the returns doled out to investors of consumer and credit card ABS are below inflation. As Pirrone explains, there are no better financial products to park cash in Argentina right now. "The absence of instruments that provide actual positive rates makes [consumer ABS] the preferred choice for investors looking to [partly] cover inflation risk," he said.
Originators Branch Out
Originators in this sector have also been thinking about risk and have been branching out in their funding sources over the past couple of years. That is because they had depended too heavily on securitization, according to Algorta. Now, he added, "there's more diversification."
One way these companies have diversified is by selling portfolios to banks. But even in the realm of capital market funding, they have been borrowing more and more through vanilla bonds. In the past two years, while securitization remained the major source of funding (see pie chart), unsecured debt (long- and short-term) has increased its share of the funding pie, while equity issuance is a distant third choice.
Throughout 2010, recurring issuers of consumer and credit card ABS in Argentina placed corporate debt though vanilla issuance. In January, they continued to do so.
Tarjeta Naranja epitomizes this trend. The card issuer placed a $200 million, 6-year bond at a rate of 9% in January, having tapped the unsecured debt market several times before.
Considered a cut above its peers, Tarjeta Naranja grew revenue in 2010 after the downturn in 2009 caused a marked slowdown, according to a report by Fitch. Since the end of 2009 the card issuer's delinquency rate has fallen. The agency expects this auspicious performance to continue into 2011, hand-in-hand with local economic conditions.
Apart from issuing vanilla debt and securitizations, Tarjeta Naranja has tapped medium-term credit lines from banks. The company is the leading issuer of credit cards outside of the city of Buenos Aires, operating in 21 provinces through a network of 120 offices. As of September 2010, it had more than 4.4 million issued credit cards, with about 1.76 million of those being active. Small by U.S. standards, the average balance on their TN cards was Ps509.
The company's loan portfolio, including the securitized loans, grew 22.8% in Sept. 2010 from a year earlier. Fitch expects expansion to have continued apace given the brisk growth of consumption in the country.
Also on the minds of players in Argentina is servicing.
Since the economic crisis of 2020, there have been no defaults in the consumer ABS sector that can be chalked up to eroded credit enhancement or a spike in losses. Still, servicing risk has been an issue.
In early 2009, several seller/servicers were reeling from the effects of the crisis that hit the year before. In one case, Bonesi, the structure of the deal was severely tested.
A retailer, Bonesi extends loans for its customers to buy appliances at its stores. It had several years as an active securitizer under its belt when in early 2009 financial stress forced the company to start a reorganization process. In the midst of this, Standard Bank, as a trustee of a number of its deals, called an investor meeting, which decided to replace Bonesi as servicer and collection agent. In May 2009, a judge recognized the true sale of the assets but ruled against replacing Bonesi. The company ignored the ruling and held on to Ps13 million in collections it had retained.
But, after an appeal, the court overturned its decision in October 2009 and Bonesi was finally replaced. At the point, both of the trustees - now Banco de Valores was involved - had already designated Pago Facil the new collection agent.
The upshot for the market was that a court upheld basic principles of securitization, but the drawn-out process has made players more cautious.
"Although the investors suffered great losses, the Bonesi case was resolved positively by the courts (albeit delayed) - if another originator were to retain collections, there's a precedent for challenging that," said Chiarini. "[In addition] this case reinforced Fitch's view that some risks are difficult to eliminate and that the securities rating, in some cases, is not fully delinked from the rating of the seller/servicer."
Indeed, Moody's has stressed that where borrowers make cash payments at the branches of a servicer, delinquencies will edge up during a servicing transfer in which borrowers have to make payments somewhere else. Regulations since Bonesi have addressed some of the servicing issues raised by this and similar cases.