Banco Hipotecario (BHN), the biggest issuer of mortgage-backed securities in Argentina, is expected to launch its fourth MBS transaction this week through its BHN 4 Mortgage Trust Series 1999-1 securitization vehicle.
The deal, agented by Warburg Dillon Read, is expected to be worth $150 million.
In contrast with BHN's three earlier international deals with Credit Suisse First Boston and two local securitizations with Deutsche Securities, the present transaction features an insurance policy for currency inconvertibility from a subsidiary of Zurich American Insurance Co.
As one of the biggest issuers in Argentina after 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 at JP Morgan. "If Argentina does nothing to reform its fiscal policies and its labor market we feel that convertibility is going to blow up."
A philosophical difference
Based on the inconvertibility insurance, Moody's gave the BHN transaction an A1 international credit rating, and Fitch IBCA assigned an equally high A-plus international rating. Standard & Poor's did not rate the transaction on the global rating scale, but did assign a rating for the senior class on the national Argentine scale which would translate on a BB+/BBB- on the global scale.
Maureen Coen, head of Latin American ABS at Moody's, could not comment on the BHN transaction until it becomes public but explained 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."
This is the first time that Moody's has rated a transaction involving assets generated in the Argentine market and it brings to into relief a difference of opinion between the four international rating agencies that has already surfaced elsewhere in the world notably with Hong Kong mortgage deals with Moody's and Fitch on one side and Duff & Phelps (DCR) and S&P on the other.
While Moody's and Fitch are happy to rate deals above the sovereign ceiling if there is a swap or as in this case an insurance policy that deals with the possibility of inconvertibility, S&P and DCR will only rate above the sovereign ceiling in exceptional circumstances, such as a full insurance guarantee or a fully-funded offshore reserve fund.
"There is what you could call a philosophical difference here. And you can see how it works with the way that Moody's will rate Hong Kong mortgage deals at triple-A, thanks to the quality of the collateral and a currency swap that takes away the convertibility risk. Yet those deals trade well outside the range of where real' triple-A deals trade because investors believe that the ratings don't take into account of the sovereign risk," a banker in London said.
The final arbiter
Judging by the reaction of some market players, the Moody's and Fitch approach will be viewed in a similar fashion by investors in Latin American securitizations.
"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, " explained an investor.
Others were quick to agree: "This is a very aggressive rating, it implies that this MBS deal is stronger than any other debt in the country," said another source familiar with Latin securitizations. "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 the October presidential elections, which could directly affect mortgage payments.
"[Moody's] gave the BHN transaction an A-level credit rating at the same time as 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."
Undoubtedly, the offering has many strong points, including 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, an analyst with Fitch 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," said Coen. "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."