Tougher financing conditions, coupled with doubts over the return of looser credit, are drawing the leading Brazilian banks back to structured finance.

Over the past couple of weeks, Banco do Brasil (BdB), Unibanco and Banco Santander's Brazilian unit have tapped their diversified payment rights (DPRs). These come on top of the DPR deals that BdB and Banco Bradesco executed in March. The frequency of issuance in a two-month span from these erstwhile engines of emerging-market ABS is unlike any the market has witnessed since 2004.

But there's something different about this bout of activity. Thanks to the lingering anxiety over the pricing of risk, a question mark still hangs over the willingness of market investors and originators to meet eye to eye on yield. The pricing of recent deals isn't necessarily what traditional buyers of this paper are after.

There does appear to be one exception, but it may end up proving the rule. Scheduled to fund this week, Banco Santander's $190 million, seven-year paper went to market investors, according to sources close to the transaction. But it was unclear at press time whether the number of buyers was large enough to indicate whether the deals would mainly be retained or go to arrangers' conduits or whether the deals would be sold to institutional future-flow investors. The other problem with the applicability of the Santander transaction, which priced at 6.218%, was the fact that the originator is a unit of a highly rated Spanish bank that has a reputation for not abandoning its subsidiaries in hard times, said a source away from the deal. Wachovia and Santander Investment led the transaction. Fitch Ratings, Moody's Investors Service and Standard & Poor's gave the deal ratings of A-', A3' and A-', respectively.

The bank made its debut in this asset class in September 2004, when Santander and recently merged Banespa issued a seven-year $400 million deal via Merrill Lynch.

S&P boosted its ratings by a notch on the DPR programs from Santander and its Brazilian peers after raising Brazil to an investment-grade BBB-' from BB+'. While widely anticipated, the move is likely to improve the prospects of deals from Brazilian issuers.

Unibanco's $200 million seven-year deal closed last week and was rated A1' and BBB+' by Moody's and S&P, respectively. It was understood to have been partly or fully sunk into Manhattan Asset Funding Co., an ABCP conduit administered by Sumitomo Mitsui Banking Corp., according to market sources. A source at Sumitomo didn't return a call for comment. Sumitomo's SMBC Securities and WestLB arranged the transaction, with pricing undisclosed as of press time.

Manhattan Asset had $1.78 billion in outstanding commercial paper as of January, having grown from $1.02 billion in September of last year, but well below the $3.03 billion of June 2007, according to data from S&P. The number of sellers totaled 26 at the end of January, with an average seller size of $69 million. Some 71% of the assets backing the conduit are investment grade. Moody's and S&P rate Manhattan Asset Prime-1' and A-1', respectively. Fitch withdrew its rating on the conduit in July 2007.

Unibanco is Brazil's fifth-largest private bank by assets and generated roughly 3.7% of all payment orders processed through Brazilian banks, according to S&P. Structural features that mitigate risks include triggers for the debt-service coverage and an offshore collection - which helps keep any threat of sovereign interference at bay. Both of these features are typical for Brazilian DPR transactions. Unibanco raised $600 million last year by tapping DPRs.

The third in the recent trio of issuers, BdB placed a $150 million, 10-year transaction that was self-led and sold to a single investor, according to sources. The coupon was reportedly 5.25%, but it was unclear at press time whether the deal priced at par. Moody's and S&P rated the deal A1' and A-', respectively.

In early March, BdB closed a $250 million, six-year DPR deal wrapped by Assured Guaranty. That deal marked the end of the bank's four-year hiatus from collateralizing this asset class.

Also on the DPR front, there was market talk that Dresdner Kleinwort was eyeing European investors for a $200 million, seven-year tranche it had underwritten for Bradesco in December of last year. To filter it into the market, the bank has reportedly registered the deal for Reg S distribution. A Dresdner official hadn't returned a call for comment by press time.

The DPR flows of Brazilian banks are sensitive to the economic performance of the country and its trading partners and to the vicissitudes of inward foreign direct investment. An economywide slowdown can hurt the kinds of activity that underpin DPR flows. But distress in particular sectors could also impair DPR figures. In the past few years, for instance, the asset class has been powered by the strong prices of oil, iron ore and other commodities. Lower prices would weaken that engine of growth.

Peru on DPR Radar Too

Meanwhile, Peruvian banks appear to be on the DPR radar as well. Banco de Credito del Peru, which placed a $500 million DPR deal via Standard Chartered last year, was heard to be considering a tap soon. An official from the bank said nothing had been decided, but that if a deal were forthcoming it would be private. Market talk was that a mandate had already been awarded.

Meanwhile, peers BBVA Banco Continental and Interbank were also understood to be open to pitches for a financial future-flow transaction. Interbank had canceled a deal only a few years ago because of political noise, according to one market source.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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