Over the past few weeks, Brazil has experienced its own version of the flight-to-quality that's torn through the U.S. and Western European money markets. Small and medium banks are seeing depositors defect to larger competitors, while funding sources have evaporated.
These smaller lenders are behind deals backed by automatically deducted payroll loans, one of the most active ABS spaces in the reais market. For now, the transactions appear to be weathering the more difficult environment faced by their originators and, by extension, servicers. Credit quality, while on the decline, has held up well. The outlook for future issuance, however, is undoubtedly impaired.