Argentine regulators have imposed a new rule on tranche issuance that could broaden the investor base for ABS while it simultaneously cools activity. Additional proposed changes might have a more chilling effect.

Leery of the popular practice among consumer finance originators of snapping up the most junior tranches of their own ABS deals, the national securities commission (CNV) instituted on Dec. 6 a rule requiring that these pieces, known as participation certificates, be offered to the general public and, by that token, have at least one rating.

Regulators dislike the idea of originators retaining the certificates because of the tax exemption on the capital gains generated by these tranches. Since these junior pieces are quasi-equity and only pay on maturity, the gains are treated as dividends, which in Argentina are paid by the distributing companies and not the investors, according to Rafael Rivero, head of finance at Banco de Credito y Securitizacion. That leaves the originator with a zero tax bill on any potential gains from the certificates.

But then losses can't be booked either, and that adds an incentive to keep the assets on the balance sheet, where losses can offset gains. While Rivero doesn't think the impact on issuance will be too severe, he sees structures with slightly more subordination and thereby a reduced incentive for consumer finance companies and banks - the main drivers of ABS in Argentina - to bring down interest rates.

"Ultimately this could hurt consumption," Rivero said. Maiming consumption appears to be precisely the goal of some authorities, who are more worried about inflation than about potentially hurting growth in an economy that's been expanding at 8% a year for five years. A broad cross-section of experts put inflation at about 20%, more than double the government's most recent official estimate of 8.5%.

More aggressive moves from regulators might be aimed at ABS.

Argentine media outlet El Cronista has reported that the CNV sent a statement to the federal tax authority (AFIP), expressing concern about originators' use of securitization as a vehicle for tax evasion. Requiring arrangers to offer the certificates was one way to tamp down on the practice. But it might not be enough. The Web site mentioned that the government would like to go further and reduce other tax benefits of financial trusts, a move that would make securitization much less lucrative for many issuers, in particular consumer finance companies that have become the lifeblood of the sector over the last several years.

An email to AFIP was not returned at press time.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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