Brazil's capital markets were glad to see the back of a disastrous 1999, but even though the exchange rate has stabilized, inflation is under control and interest rates are down, 2000 is unlikely to be a great year for local or international securitization.

Cross-Border Deals Are Few and Far Between

The only Brazilian issuer to brave the international markets in 1999 was Ceval Alimentos S.A., a subsidiary of Bunge Trade Ltd. The company, Latin America's largest maker of soybean products, issued a $225 million future flow securitization (ASRI 4/19/99 p.2). This year, Companhia Vale do Rio Doce (CVRD), Brazil's largest mining company, is expected to hit the markets with a $300 million deal in the first quarter, but there are few signs that the pipeline is building further.

"We haven't seen any structured finance transactions so far," said Daniel Araujo, Standard & Poor's Brazilian corporate ratings director in Sao Paulo. "The main reason is the price that issuers would have to pay in order to access the market, even if they insure the transaction. Investors are still wary of the country risk, which translates into little appetite for this type of paper and very wide spreads."

"Because of the operating environment that currently exists in Brazil, access to the international markets is mostly limited to companies that are major exporters, have strong ties to multinationals and broad geographic diversification," Araujo said.

Not Much Better Locally

The picture is not much better for the local securitization market. It has failed to gather momentum, mainly as a result of a deficient legal framework and burdensome tax provisions.

By passing Resolution 2439 in May 1998, Brazil's central bank took an important first step toward promoting the securitization of banking receivables by financial institutions (until then securitization had been authorized only for consumer receivables and only by non-financial institutions). However, while the resolution permits the securitization of new asset classes, significant hurdles will still get in the way of growth.

"The main problem with the resolution is that the financial entity assigning the assets to the special purpose company is prevented from providing credit enhancement in the form of overcollaterization," said Vinicious de Queiroz, director of domestic securitizations at Citibank in Sao Paulo. "This makes it almost impossible to close a deal because the investor is not getting any kind of comfort and so is very conservative in the pricing."

Another limitation is an onerous bank secrecy law under which lenders may not disclose lending and portfolio information. In addition, costly Brazilian taxes and registration fees make securitization too expensive to be cost-effective for issuers.

"The federal government has a huge fiscal debt and is unlikely to have any interest in relieving tax burdens for any sectors," explained de Queiroz. "Any reductions for the sake of securitization would bring about requests from other sectors."

Meanwhile, the market is awaiting the impending amendments to Resolution 2493. "The Central bank is expected to increase the flexibility of the resolution in the next few months," said Mario Guedes, director of debt capital markets at Brazilian bank Unibanco. "Though it will not happen immediately, I believe that those changes are going to set the ground for a transactions involving the assets of financial institutions."

Others were less hopeful: "I'm not very optimistic," said de Queiroz. " New regulations might reduce the tax burden but it will not eliminate it."

But What About MBS?

With the enactment of Law 9514 in 1997, the Brazilian government hoped to improve the quality of collateral for lenders and promote the development of a secondary mortgage market.

The legal changes introduced the concepts of fiduciary ownership for real estate and fiduciary title of credit rights originated by the sale of real estate ("Alienaco Fiduciaria de Bens Imveis").

They also allowed for the creation of securitization companies - limited-purpose entities that issue securities backed by mortgages acquired from financial institutions. To make that possible, the legislation created a new type of security (the Certificado de Recebveis Imobiliarios or CRIs) and the first securitization company, Companhia Brasileira de Securitizaco (Cibrasec).

In essence, the securitization company buys a pool of mortgages from the originator. Since the mortgages purchased are indexed to the reference rate (Taxa de Referencia, TR), CRIs are indexed to that same rate.

So far, Cibrasec has purchased R$165 million ($93 million) in mortgages and is inching toward its first securitization. "We hope to reach $140 million in assets in the near future," said a Cibrasec official. "Then we'll have enough size to sit at the table with prospective investors."

But whether local institutional investors will be interested is another question. "I'm not sure how much appetite there will be among investors," said Jose Ramon Tora, an analyst with Standard & Poor's in New York. "Mostly because of the lack of economic stability, the low coupons and the long term of the bonds."

Other issues that will be important in the development of mortgage securitization are the standardization of the underwriting process for mortgages and the lack of historical loan data.

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