Argentina’s provinces are re-enacting the past. In the last year, three have publicly issued deals backed in part by revenue from a federal government institution, recalling a time when securitizing co-participation revenue from the central government was all the rage. That was before the crisis of 2001-2002.

There is bound to be more of these deals, issued so far by Mendoza, Salta and Chaco as a way to finance housing developments, sources said. The federal government itself is understood to be acting as a primary, if not sole, investor, having deep coffers after it nationalized private pension assets in late 2008, a move that brought in somewhere in the ballpark of $30 billion. 

The most recent deal is a Ps350 million ($86 million) transaction being issued by Buenos Aires province. The legal final maturity is 2026.

Primary collateral consists of loans originated by provincial housing entity IVPBA to purchase low income houses planned for Buenos Aires province. Proceeds are earmarked for their construction. What is interesting about this deal, and others of its ilk, is that the secondary source of repayment is what matters for the deal’s creditworthiness. In this case it is federal coparticipation revenues, which are flows doled out by the central government to the provinces.

“The quality of the loans themselves is bad,” said Martin Fernandez, a senior analyst at Moody’s Investors Service, which rated the deal ‘A3.ar(sf)’, the same as the provinces’s standalone rating. “The houses haven’t been built yet and the borrowers have very low income; it’s not collateral that’s good enough for the capital markets.”

This is why this class of deals need the secondary source of payment linked to the federal government.

But even that source has a dodgy track record. As Standard & Poor’s Managing Director Juan De Mollein pointed out, some provinces that securitized coparticipation revenue in the pre-crisis days tried to meddle with the transactions when the economy went south.

“There’s commingling risk and the risk of interference,” he said, adding that while the collateral adds to the security of a provincial deal there has not been one transaction in these recent batch that has exceeded the underlying rating of the issuing province or provincial entity.

This applies to deals that rely on other forms of federal-linked revenues as well. Indeed, most of the transactions in this new wave receive secondary flows not from coparticipation revenue but from transfers that national housing fund FONAVI makes to each province.

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