Latin America's two largest markets - Brazil and Mexico - will present ABS players with different sets of risks and opportunities next year.
For its part, Brazil will remain fertile ground for originators, bankers and analysts alike, although a boom in consumer lending is fueling talk of a bubble and its attendant dangers.
Meanwhile, the mortgage monkey is still clinging to the back of Mexico's nonbank originators, which does not, however, preclude another big year for RMBS from the country's alpha lenders, the coterie of leading banks and state agencies that have kept the industry afloat throughout the crisis.
To be sure, opportunities will pop up here and there in other asset classes in Mexico, but it will be difficult to muster the level of enthusiasm showered on housing finance a few years ago, especially when alternative funding sources are looking more competitive than complementary for securitization.
Brazil: Consumer Boom or Bubble?
On the face of it, going into 2011 Brazil's domestic securitization industry is in the best shape of its life. The economy is projected to grow in the ballpark of 5%, following on the heels of about 7.5% this year, which would be, in turn, a powerful rebound from the negligible 0.2% contraction in 2009.
Specifically pertinent to ABS players, consumer finance has been booming, and receivable investment funds (FIDCs) won over new investors in 2010.
While issuance volumes in the FIDC market are notoriously tricky to determine - as a fund a transaction might be launched but not have its shares fully subscribed - by most accounts they grew. Luciano Araujo, a managing partner of boutique shop Hampton Solfise, put the figure of registrations for 2010 as of press time at about R$10 billion ($6 billion) from R$8 billion the previous year. "A very good proportion of this has effectively been distributed," he added.
The year saw deals in a number of asset classes, including consumer loans, auto loans and transactions by suppliers to oil giant Petroleo Brasileiro (Petrobras) on the domestic front, and drill ship financing, also linked to Petrobras, on the cross-border side. Players expect more of the same, although some observers are flashing red flags for consumer assets.
"Hopefully the market doesn't get too far ahead of itself," said Fitch Ratings Managing Director Greg Kabance. "There's plenty of competition and it fuels competition to get new borrowers. If you want to talk about the credit side, things are holding up pretty well, but will it get derailed?"
Indeed, delinquency levels for payroll deducted consumer loans and vehicle loans were falling steadily since the crisis-induced uptick at the end of 2008 and beginning of 2009, according to a report from Moody's Investors Service. But the most recent figures highlighted by news reports suggest a rise in the last couple of months. In addition, Moody's warned of potentially slipping underwriting standards as lenders have aggressively tapped new borrowers over the past few years. "Looking at new securitizations in 2011, investors should be especially mindful of borrower profiles and the track record of sponsors in their respective niche markets," the agency said.
Many are already taking a much more critical view of the industry after Banco Panamericano, an originator that had been active in the FIDC market, was discovered by authorities to be overstating assets. The bank appeared to have been selling loans to other banks while keeping them on its books. The investigation continues but in the meantime funding costs for similar-sized banks, major providers of securitizable assets, have edged up.
According to a November article of The Economist, loans in the financial system as a percentage of GDP climbed from somewhere around 25% in 2000 to well over 40%. The outstanding stock of total consumer loans - stripping out bank overdraft credit and credit card lending - reached an all-time high of R$196 billion as of Sept. 2010, according to Moody's. In the same month vehicle loans hit a historic high of R$125 billion.
The heady rise of consumer lending, and by extension growth in consumer ABS, could very well be held in check by recent government measures that jacked up the cost of taking out loans beyond four years, a market source said.
Alongside those changes were other measures that made long-term investment in Brazilian infrastructure more attractive to institutional and retail investors, both domestic and foreign. While this might eventually open the door for ABS originated by infrastructure operators (ASR, 12/2010), in the nearer term it is more likely to spur securitization activity from originators that are not operators or concessionaires per se but rather work with them, according to Araujo. This approach might be akin to the suppliers for Petrobras that have sourced cheaper funding by issuing FIDCs and using the oil giant as an obligor. While the tax incentives are designed to incite infrastructure operators to issue long-term vanilla bonds, corporates in ancillary industries might find FIDCs are more appropriate for their time horizon. The bullet train being planned between Rio de Janeiro and Sao Paulo serves as an example, Araujo said, with a number of companies likely to be contracted to manufacture the rails and build the tunnels and bridges. "These are companies that will need financing and [they will work under] three-to-five year contracts," he added. Those contracts could be securitized.
Finally in Brazilian real estate, signs point to a larger, more fully realized RMBS market, but they have been pointing in this direction for years and it is unclear whether certain issues will be resolved in 2011 to actually make it happen. Banks in the country will likely continue to face disincentives to shed mortgages from their balance sheet, even though there is talk that an RMBS by state-owned Caixa is in the works.
"The market is still debating what is the best way to finance mortgage origination," said Juan de Mollein, managing director of emerging market structured finance at Standard & Poor's. "But the Central Bank is keen on finding alternatives." He added that one option that might be particularly well-suited to Brazil's regulatory situation is the issuance of covered bonds, a topic that has been heavily discussed over the past year.
Meanwhile, the commercial real estate side will continue to generate the sort of single-name-linked deals that has been thia business line's mainstay for some time. "There's a lot of unlevered real estate in Brazil and corporates are trying to release cash," said Kabance. "It's a consistent sector."
Mexico: State Agencies Sustain RMBS
The leading story in Mexican securitization remains real estate, even though other asset classes will get tapped next year as well. Mortgages will dominate primary supply in 2011 as they did in 2010 but issuers will be confined to just a handful: stage agencies Infonavit and Fovisste and large banks. Nonbank originators known as Sofols are still on the sidelines. The rapid deterioration in the performance of both mortgage and construction loan portfolios - especially the latter - have soured investors on Sofols and it is not clear how or when they will be enticed to come back.
"A lot of things have happened that have put investors on the defensive," de Mollein said. He added, however, that spreads over local treasurys for deals from Fovissste and Infonavit tightened throughout the year, indicating that investors were growing comfortable again with housing.
But it is difficult to envision a marked turnaround next year in the performance of Sofol deals - a prerequisite for transactions to be palatable again to investors. Moody's sees three big problems sticking around for at least a portion of the year. While the country's economic prospects are improving - it typically moves in tandem with the U.S. - the Sofol sector is weighed down by a larger proportion of borrowers working outside the formal sector, which are those most vulnerable to unemployment or underemployment. In addition, payments are not automatically deducted from paychecks as they are for Infonavit and Fovissste, which leads to lower cure rates. Finally, servicer quality among Sofols has frayed throughout the crisis and its aftermath.
Not every development is bleak for the sector. The market has witnessed its first servicing transfers, for instance, which have proceeded in a remarkably smooth manner. "We saw replacement of servicers in deals from Credito y Casa and Su Casita [and] none of have faced any legal or operational challenges," de Mollein said. "This is important for investors to regain confidence."
But that turnaround will probably take more time. It is Infonavit and Fovissste that will be the focus of RMBS issuance next year. In addition, the agencies may even branch out into new areas.
"Infonavit is moving into higher-income borrowers and they're looking at cross-border potential," said Fitch's Kabance. He added that the agency is apt to use the securitization platform set up by Hipotecaria Total (HiTo) for the occasional deal, following its debut issue off this program in 2010.
Covered bonds are a possibility for Infonavit and Fovissste as well as other leading banks. Covered bond legislation is now in the Mexican congress and it is widely expected to pass, according to de Mollein.
Outside of real estate, players see potential in a number of the asset classes that generated business this year. These included future flow fleet contracts, auto loans, trade receivables, leases and vehicle dealer floorplans.
