At least one Brazilian investment bank, boutique outfit Hampton Solfise, has begun to promote domestic currency-denominated receivables investment funds (FIDCs) among U.S. investors. Recently hired as a Hampton director, Stephen Taber went on a non-deal roadshow in early February to New York and Boston, targeting hedge funds, insurance companies and mutual funds. "Given the intense global demand for fixed income, people will start looking at alternative investments," said Taber, who has worked at hedge fund Latin American Technology Fund. While the tour did not push a particular product, the bank does have a fund under its belt, having launched consumer loan-backed FMAX in mid-2003.

Given that currency swaps are fairly expensive, Hampton is betting that buyside players might opt to hop in without one. "We're looking for the people that have the view that FX volatility has diminished" in Brazil, Taber said.

The idea is not that far-fetched, said U.S.-based players. "Buying local currency instruments is already part of equity culture, so it wouldn't be outrageous for these funds to get snapped up," said one source.

One steep challenge, however, is poor liquidity. A secondary market has yet to emerge and overall volumes in the FIDCs are likely to stay shallow by U.S. standards for some time. That can be a major turn-off for investors that - as hungry as they are for high-yielding paper - demand a certain degree of liquidity. "You might get around this by creating a system of market makers," said one source.

According to data compiled by Fitch Atlantic, some R$1.8 billion (US$623 million) in FIDC deals closed last year. Public deals tracked by ASR have raised roughly R$345 million (US$119 million) from the market so far this year.

The yield appeal of FIDCs is their main selling point. While their national scale ratings of up to AAA' would probably not even make investment grade on the global scale, for coupon clippers they provide a fat spread. Most transactions are priced against the local CDI benchmark and are currently yielding in the upper teens. "The guys that are [emerging-market] buyers and take the double-Bs without a swap might look at this," said one New York-based banker.

And they have an incentive as well. Spreads for dollar-denominated EM paper have been shrinking over the last year.

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