No conference on Latin American structured finance would be complete without a discussion of diversified payment rights (DPRs), the asset class of electronic money flowing through banks that boasts a default rate lower than triple-A U.S. corporates.
Indeed, there still has not been a DPR transaction that has not paid back investors in full, according to participants of the Securitization and Structured Finance in Latin America (SiLAS) conference, organized by Euromoney Seminars and LatinFinance.
The sector has faced serious tests, the most recent when Kazakh banks defaulted on their vanilla debt and yet ended up entirely paying down their DPR transactions.
But for many emerging markets issuers, inside and outside of Latin America, the question is whether tying up assets in a DPR deal makes economic sense when unsecured funding is cheap, especially for the top-tier banks that are the DPR issuers favored by investors.
"Most EM issuers are in a totally different stage of their lives now that they have no need to do future flows," said PIMCO Executive Vice President Brigitte Posch. "They can issue senior unsecured paper in a much faster, less complex way at prices that are similar to future flows."
In addition, there is less incentive to mitigate risk from the sovereign, as now five Latin American countries are rated investment grade by all three agencies.
But DPRs are not dead. For one thing, while it is more difficult for second-tier banks to receive the ratings boost that is afforded the leading banks, they are attempting to move into the sector.
"Over the past five to six years we've been moving down the food chain in terms of mid-sized banks tapping the DPR market," said Doug Doetsch, a partner at Mayer Brown.
A believer in DPRs since Turkey's GarantiBank issued the first one in 1999, Violet Osterberg, co-head of specialty investments at Pacific Life Insurance Company, still sees value in the product. But she is sticking to highest-tier banks.
"They're still very attractive for me," she said. "I continue to want a DPR instead of senior unsecured [from an emerging market bank]."
These banks, however, must be top players, as Osterberg argues that institutions with systemic importance are the ones that would survive a sovereign meltdown.
"The correlation between the sovereign and banks is huge, so if you want to avoid true sovereign risk, you enter into a DPR transaction. The top players will continue to operate, maybe even in bankruptcy," she said.
DPR deals can also allow issuers to term out their debt. An investor such as Osterberg is willing to go out as far as 15 years. Indeed, it jibes well with the long-term, buy-and-hold strategy preferred by Pacific Life.
The systemic importance of a bank also matters in the notching of the ratings, said Fitch Ratings Director Bernardo Costa. Banks with less systemic weight generally cannot get much ratings uplift. "For DPRs you can go into smaller-sized banks; it just depends on how much notching," Costa said, citing Turkey's DenizBank as an example of a bank that does not have the systemic weight of its larger peers - it ranks about ninth in the system - and partly as a result received a one-notch boost from its local currency rating in a recent DPR transaction.
Issuers that are even smaller can leverage their DPRs, but they may have to go to multilaterals.
True to its mandate to help institutions in developing economies, the International Finance Corporation (IFC) has given support to less systemically important institutions in this sector. Last year, the multilateral purchased a $30 million, seven-year private placement from Fedecredito, a Salvadoran credit cooperative. That transaction was backed exclusively by workers' remittances, which is generally only one of the components of cash flows in a DPR transaction.
This was the first time the IFC was involved in a DPR transaction. "In order for us to support a deal, there has to be both a development role and it has to be economically feasible," said Lee Meddin, global head of structured and securitized products at the multilateral. "But since the crisis we've had an initiative to get the organization comfortable with the asset class as the market's dried up."
In the case of Fedecredito, he said, the bank could use the platform to eventually issue transactions into the market. And the multilateral has also purchased portions of its first Turkish DPR transaction in August of last year, an $862 million deal for Akbank. This was followed by its participation in a â‚¬300 million deal from DenizBank last April.
"In Turkey, it's a window; you won't see us there in two years," Meddin said.
He added that the multilateral is looking into transactions in Africa with top-tier banks but that it is more difficult to convince issuers to part with their "prize assets." "Remittances are considered the crown jewels," Meddin said. "They have to be willing to sell them in order to get the [several] notch upgrade [afforded by a future flow transaction]."