Working with Bear, Stearns & Co. seems to have done the trick for Argentina's Banco Hipotecario Nacional's long awaited fourth transaction BHN IV. The bank priced $156 million in mortgage-backed securities last week. The notes featured a political risk insurance policy from Zurich U.S. Political Risk and were rated A1 by Moody's Investors Service and A-plus by Fitch IBCA.
Bear introduced several changes in the structure from prior BHN deals. "We reduced the legal final maturity of the notes from 20 years to 11 and refined the cash flows," said an official at the bank. More significantly, the transaction featured a political insurance policy from Zurich U.S. Political Risk that enabled it to reach its high rating and the offering was divided in two tranches: a $119.5 million tranche with a variable rate and a $36.5 million tranche with a fixed rate. Both tranches are backed by fixed-rate collateral.
"This was never done in any previous BHN deal," said the banker. "By offering investors alternative coupon instruments we were able to distribute it over the broadest possible investor base."
The variable-rate tranche was sold at 125 basis points over Libor and featured an 8.4125% coupon, while the fixed-rate tranche was sold at 400 over Treasurys with an 8% coupon.
Though officials at the bank argued that the deal priced in line with comparative historical pricing levels, other sources thought that the spreads were rather wide considering the transaction's ratings.
"Four hundred basis points over Treasurys is more reflective of a triple-B-minus rating than an A1/A-plus rating," said a source from the buy side. "The arrangers wanted the high ratings for marketing purposes but the market didn't buy it."
Other sources argued that the political insurance policy was not enough to tighten the spreads. "The deal is backed by a pool of debtors who receive their salaries in local currency and are therefore subject to fluctuations in the local economy," said an investor. "If the economy takes a turn for the worse, the insurance doesn't cover the risk of devaluation. That's why the deal priced at 400 basis points over Treasurys."
Given the tumultuous history of the BHN IV transaction, which included three different arrangers (Credit Suisse First Boston, Warburg Dillon Read and finally Bear Stearns), as well as a heated debate among the rating agencies, finally getting the deal on the market was good news in itself. It was even better news for the arranger, who is looking to increase its visibility in Latin America.
"We brought excellent distribution capabilities based on the fact that Bear Stearns has a very large and very active mortgage department with excellent research," said a source at Bear. "We'd love to do more deals out of Latin America. The big issue holding us back is the scarcity of issuers, not a lack of demand. In fact, many investors that participated in the deal were asking when the next BHN was going to come to market."
Another Argentinean financial institution, Banco de Galicia y Buenos Aires, has been mulling its own cross-border MBS for some time now. Following failed attempts to launch a transaction in 1998 and 1999, the bank is now working with Merrill Lynch on a deal that will be between US$100 and $200 million in size and will feature a political insurance policy from the Overseas Private Investment Corp. (OPIC).
Even though Banco de Galicia has an excellent track record and is the country's largest commercial bank in terms of assets and branches, it has so far been overshadowed by Banco Hipotecario Nacional (BHN) as an international issuer of mortgage-backed deals.
Sources cited several reasons behind the delay of the transaction. Some argue the bank is trying to go beyond the triple-B-minus ratings it received from the agencies. Others contend that Banco de Galicia is not ceding power to Merrill Lynch. "I think bankers at Banco de Galicia wanted to structure the deal themselves and have Merrill Lynch work as a selling agent, which Merrill is opposed to," said a source familiar with the transaction. "So I think there might be some political conflict involved."
On the other hand, the arranger maintains that delays are due to the fact that key people at Banco de Galicia were on summer vacation until recently. "They don't really need the financing right now," said an official from Merrill Lynch in New York. "They will work on their transaction independently on their own time-line."