The collateralization of Brazilian personal loans, a locus of growth for securitization in the country, slowed down in the first half of the year from the second half of 2006. But the current market circumstances, should they linger, could liven things up.
"The current liquidity issues facing the global financial markets could stimulate demand for less risky and more secured assets, which could encourage new personal loan issuances through the second half of 2007," said Standard & Poor's in a report on the sector.
But there's debate about the safety of this asset class. While an increasing number of these transactions are backed by payroll-deductible loans, thereby cutting the chances of delinquencies, the way that many are structured raise questions about just how ironclad they are. "Banks are selling these deals at high premiums to the FIDCs," said Bernardo Costa, analyst at Fitch Ratings. In addition, encouraged by heady competition among banks, borrowers end up renegotiating, refinancing or prepaying a large chunk of these loans.
But, so far at least, servicers have been managing FIDCs to curb loan losses and keep powering the origination machine. For the universe of deals rated by S&P, for instance, the weighted average delinquency rates and weighted average loss rate were 5.1% and 3.2%, respectively, in June.
Total issuance of personal loan ABS rated by S&P hit nearly R$1 billion ($554 million) in the first half of the year, a drop from the amount placed in the second half of 2006, more than R$1.2 billion. A boom in IPOs by leading personal-loan banks was a major factor in eroding volumes. Through the first seven months of the year, Banco Pine, Banco Cruzeiro do Sul, Banco Daycoval, Banco Sofisa, Parana Banco, and Banco Indusval issued IPOs to the aggregate tune of Ps3.2 billion. All of these banks have sold portfolios of personal loans to FIDCs or other banks.
But IPO activity has waned since early August, as the ebb of global liquidity has made itself felt more in Brazil's equity market than in the debt world, according to Jean Pierre Cote, an associate director at S&P. Ironically, aside from a short-lived blip in issuance during August, the securitization business has fared well against the subprime MBS debacle in the U.S. and the related pull-back in credit worldwide. "Maybe if we had a more active RMBS market we would have had more concern or reaction," Cote said.
This, ultimately, could give banks that are originating personal loans an incentive to issue more ABS. Cote wasn't certain that the current circumstances would necessarily lead to upswing in volumes, but he expected more issuance nonetheless.
Origination, at any rate, is likely withstanding current conditions fairly well, considering the pent-up demand for this product, and local interest rate dynamics. Through the first half of the year, the outstanding balance of personal loans in Brazil was more or less consistently grinding higher every month, surpassing the $90 billion mark in June, from roughly $70 billion a year earlier. The fastest growing segment is that of payroll deductible loans for employees of municipalities, states, state-owned companies and retirees on state pensions. It accounts for more than 60% of all origination, from under 30% three years ago.
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