As the dust settles from the initial shocks of the Argentine default and devaluation, it is becoming clear that the current crisis will stress structured finance transactions greater than any previous emerging market meltdown. Fitch Ratings has rated approximately 175 emerging market structured finance transactions within the past 12 years and, prior to 2002, no Fitch rated transaction had defaulted. These transactions endured incredible stress including devaluations in Mexico and Indonesia, a sovereign default and coup d'etat in Pakistan, and banking crises in Venezuela, Turkey and Mexico. The current Argentine crisis has caused the first ever defaults in this asset class and Fitch anticipates defaults will increase over the course of the year. Fitch has rated 19 Argentine cross-border securitizations and 118 local securitizations within Argentina. While certain transactions have proven their ability to protect against sovereign risk others have folded under the pressure as they were more susceptible to Argentina's legal and regulatory regime.
The clear survivors during this meltdown have been the export receivable future flow securitizations that include Molinos Secured Export Notes (SEN's), YPF SEN I and YPF SEN II. Transactions which were not as fortunate include preferred creditor B loan transactions for TGN and Aquas Argentinas and residential mortgage deals (BHN III, IV and BACS I). Other transactions with a high probability of default include the provincial co-participation transactions.
Future flow securitzations
Fitch rated four future flow transactions which securitized the future revenues due from exports. As the buyers are obligated to remit payments into an offshore collection account and these collections are outside the control of the Argentine sovereign, these structures have protected against the transfer and convertibility restrictions imposed in Argentina. Additionally, as these companies have substantial revenue generated in U.S. dollars they have been insulated from the effects of the massive Argentine devaluation.
Fitch maintains a BBB-' rating on YPF's SENs. The SEN I notes paid down as of May 2002 and the SEN II notes are due in October 2002. Although the corporate rating has been downgraded to B+', Fitch believes the performance risk on the SEN's remains strong. These transactions are backed by oil exports that are delivered to ENAP (a A-' Chilean entity) via a pipeline. ENAP pays to the offshore collection account protecting against the Argentine transfer and convertibility restrictions.
The Molinos Secured Export Notes securitizes future revenues generated from grain exports to the U.S. Fitch has downgraded the corporate rating to CC', however the current rating on the SENs is at B'. While the credit quality of Molinos has deteriorated, its revenues are approximately 30% from exports and Fitch believes these export flows ensure the SEN holders of a higher probability of payment. As the structure traps export receipts offshore, the company receives a specific exemption from the Central Bank. An additional strength to the transaction is the six-month debt service reserve that could be utilized to make up any deficiencies in debt service payments.
Preferred creditor and PRI structured transactions
Fitch rated several transactions protected by political risk insurance and by the umbrella of preferred creditors such as the World Bank, IFC and IDB. These structures were used to protect against transfer and convertiblity risks ensuring access to dollars in case of a currency crisis. These transactions have been put through the test in Argentina as restrictions on bank withdrawals and foreign currency payments have been in place since the Presidential Decree No. 1570 dated Dec. 3, 2001. This decree established that principal and interest transfers should require Central Bank authorization. As of Feb. 8 multi-lateral agencies received automatic authorization from the Central Bank. While this reinforced multi-laterals' preferred creditor status, it also showed that liquidity reserves are essential to these transactions as delays regarding preferred creditors are inevitable when a country is in crisis.
The majority of the transactions utilizing these structures relate to the utility sector. These types of transactions are predicated on the fact that the underlying company must be willing and able to remit sufficient local currency in order for these transactions to function. Therefore, the willingness as well as ability of these borrowers to make the requisite payment was critical to the performance of these transactions. Due to the prohibition of foreign currency tariff adjustments related to the National Emergency Law (Number 25.561), these companies immediately sought recourse from the government, however there was no governmental authority with which to negotiate. In response, a commission was established on Feb. 22, 2002 under decree 370. While this commission was designed to offer a central authority, this will not provide near term relief for the utility sector as decisions regarding the re-negotiation of these concession agreements will take several months. This commission has met further disruptions due to the changes in political leadership.
These tariff changes have caused a tremendous stress to these transactions and caused both TGN and Aguas Argentinas to default on their IFC and IDB B loans, respectively. Edenor has remained current on its OPIC insured Notes, however it is unclear whether the company will meet its current debt service payment due June 15. TGS recently made its debt payments on its IDB B loan. As foreign exchange was extremely scarce, it took TGS several days to accumulate the $16 million due under the loan.
Another preferred creditor transaction relates to the Argentine sovereign and the World Bank Partial Guarantee. This transaction has been downgraded in-step with the sovereign rating. Fitch maintained a B' rating until May 13 when we downgraded the transaction to B-' as a result of Argentina delaying certain unrelated payments due to the World Bank in April 2002. While the sovereign ultimately made this payment within the grace period, this delay signaled a decrease in the sovereign's willingness to pay. With that said, Fitch believes the Argentine government will do everything possible to make payments on this transaction. As Argentina attempts to emerge from this crisis, funding from institutions like the World Bank and IMF will be imperative.
While the performance statistics of these residential mortgage pools did not show outward signs of deterioration during Argentine's three year recession, the riskiness of these pools was greatly increasing as the sovereign environment continued to decline. Fitch's original analysis incorporated a variety of emerging market stresses including a severe devaluation, payment holidays, a breakdown in the foreclosure process and a breakdown in payment mechanisms. As the Argentine environment continued to decline and the sovereign rating was downgraded, Fitch increased these stresses and adjustments to the transaction ratings began in March of 2001.
Argentina's default and, soon to follow, devaluation was accompanied by a variety of unorthodox measures designed to cushion the blow of the devaluation to the system. The effects of the initial devaluation could have been absorbed by the credit enhancement within the structure, however the immediate pesification of the mortgages proved to be devastating. Similar to all Argentine financial institution assets, the payment terms of the underlying mortgage contracts were re-denominated into pesos. This decree was unexpected and surprising to much of the financial community, including Fitch. Although it served a public good in helping to alleviate the financial burdens of the people, it did nothing to solve the country's greater economic issues and only exacerbated problems for a banking system on the brink of complete collapse. It also caused an immediate peso-dollar mismatch for these transactions. Credit enhancement declined by 30% overnight and then by more than 50% once the peso freely floated. Under this scenario eventual losses seemed probable, however all three transactions continued to make timely debt service payments up until Feb. 2002.
The final blow to these transactions was the pesification of the rated bonds. On Feb. 3, 2002, the Argentine government passed decree 214/2002 that pesified the dollar liabilities of many Argentine entities. As BHN and BACS trusts were governed under Argentine law, the bonds issued out of these trusts were pesified as well. As the peso was now trading at levels greater than 2.0:1, the debt payments made to investors were below the dollar amount necessary to meet timely payments of interest on the original terms and Fitch downgraded these to single-D.
Fitch has 5 structured transactions related to Argentine Provinces. All but one (Salta Hydrocarbon securitization) of these transactions were initially rated at or below the sovereign. These ratings reflected the sovereign risk inherent in these deals. Currently all of the provincial structured deals remain current, however the provincial deals related to Tucuman, Santiago del Estero, and Tierra del Fuego carry the lowest rating of C' which indicates that default is imminent. Fitch differentiates the ratings for Mendoza and Salta with ratings of CC' and CCC', respectively. The Mendoza transaction is backed by oil royalties, has a 3 month debt service reserve and will mature in the next several months. The Salta structure is rated above the sovereign and provincial rating as it utilizes a true sale structure, is backed by oil related cash flows which mitigate devaluation, has a 6 month liquidity reserve, and is protected by political risk insurance.