Domestic issuance in Latin America's bulkiest markets - Brazil and Mexico - is forecast to keep growing in 2006, despite upcoming presidential elections in both countries. Sources concede that there will be a window of diminished or no issuance surrounding the actual votes, but see little chance of a longer lasting derailment. Brazil and Mexico have presidential elections slotted for October and July, respectively.
Having blossomed into the golden child of emerging markets structured finance over the last few years, Mexico's local currency sector will edge closer to maturity in 2006. "Domestic MBS and ABS should keep growing in terms of complexity and volume," said Juan de Mollein, director in the emerging markets structured finance group of Standard & Poor's. Deals backed by entirely new assets, however, will be at best sporadic, sources said.
The real estate business will remain the jewel in Mexico's crown and new foreign players may yet find its gleam irresistible. The talk is that global arrangers that have so far been absent from Mexican RMBS - Banc of America Securities and Barclays Capital come to mind - are preparing to bring serious muscle into arranging local deals. One source said that next year could also witness the return of Deutsche Bank Securities, which was conspicuously quiet in 2005 in a sector that it had helped pioneer. ABN AMRO is another foreign name dropped as a potential newcomer to the RMBS sector next year.
Debuting in local markets only in the last two years, monoline insurers could continue wrapping deals as long as the price is right. XLCA and MBIA have already done the honors and Ambac is understood to have a transaction in the works, most likely in the real estate sector, according to sources. That would break new ground, given that its peers have not touched that asset class. "We believe that housing will continue to be an attractive opportunity in Mexico," said a source at a bond insurer.
One Mexico City-based banker said that the market will likely see structures that don't follow the rules spelled out by government agency Sociedad Hipotecaria Federal and would thereby be labeled "non-conforming." "More structures will come into play," the banker said. "There's still plenty of room for innovation."
Another topic heating up south of the Rio Grande is Euro-Udis, paper denominated in local inflation index units and issued offshore as a eurobond. Foreign investors have already shown their appetite for plain corporate peso bonds issued abroad and sources said structured finance is the logical next step. And there is a precedent, as hedge funds have bought chunks of domestic RMBS in the past year.
Finally, in an example of turning lemons into lemonade, one Mexico City-based banker said that arrangers are pitching auto loan securitizations to Ford Motor Credit and GMAC Financiera. The higher debt costs facing these issuers after repeated downgrades could prod them to tap auto loans, especially if they aim to term out their debt. "It would represent a return of these companies to the medium-to-long term capital markets," the banker said.
In Brazil, the domestic market of receivable investment funds (FIDCs) will continue to dominate structured finance activity. Some $3.70 billion in FIDCs and CRIs - a vehicle for real estate securitizations - was registered in 2005 with local regulators, nearly double that of last year. S&P projects volume growth of at least 30%, a figure that factors in the elections.
"The structured finance market in Brazil is much stronger than it was just a few years ago," said Alexandre Lodi, a manager at Oliveira Trust, which has been involved in different capacities in six FIDCs launched this year. This newfound resilience, bolstered by the vested interest of an expanding universe of originators, investors and arrangers, will likely carry it through any turbulence provoked by the October elections, sources said.
Developments likely to take place in the Brazilian domestic market next year are CDO-type transactions and innovative partial guarantys, according to Pedro Gazoni, an associate at S&P in Sao Paulo.
On the cross-border front, Brazilian banks are expected to continue to refinance older, more expensive debt with new DPR deals, sources said. Also, market upset around the elections could favor securitizations, which tend to be less sensitive than straight corporate debt.
Exporters, however, are likely to avoid structured deals as they did this year due to high commodity prices and cheaper funding elsewhere. "In Brazil, commercial lending demand makes export prepayment lending facilities quite attractive compared to full-blown securitizations," said James Patti, a partner at Mayer Brown Rowe & Maw.
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