For quite some time, it's been a whole lot of talk and no action when it comes to securitization in Brazil. However, for the first time ever, Brazil will endure a true mortgage-backed securities deal, paving the way for a secondary mortgage market in the country.

Brazilian Mortgages, a newly created mortgage entity, will structure a financial program aimed to develop the low and medium-income residential segments and the secondary mortgage market in Brazil through Brazilian Securities, a special purpose vehicle.

Group Ourinvest owns 50% of Brazilian Securities and Group Rossi owns the remaining 50%. Brazilian Securities is the second securitization company in Brazil, next to Cibrasec.

Cibrasec, created in 1998, was developed for securitization purposes; however, according to Moody's Investors Service, no transaction was actually done through the company.

"The residential sector [in Brazil] presents a significant opportunity for growth. There is a great demand for mortgages in Brazil ($6 million units deficit) that requires the development of financing alternatives to meet it," said Brigitte Posch of Moody's.

In this deal, Brazilian Securities will be a special purpose company which will provide just that. It will issue CRIs (Mortgage-Backed Securities or "Certificados de Recebiveis Imobiliarios") backed by Brazilian residential mortgages.

"This transaction is a very neat transaction because there is the involvement of the InterAmerican Investment Corp. (IIC), a multilateral organization that is part of the IDB, the InterAmerican Development Bank," Posch said. IIC will purchase the CRIs, worth US$10 million, in order to begin the development of a secondary mortgage market. The IIC will then sell the securities to the local Brazilian market and "the revolving line will be open for another MBS deal," Posch said.

The issuer will provide two classes of floating-rate CRIs, Class A worth $10 million and Class B worth $1.5 million, totaling $11.5 million. Both classes will have a legal, final maturity on 2008. The Class A notes account for 85% of the securities and are subordinated by Class B notes, which total the remaining 15%.

The assets will consist of Brazilian mortgage loans and a reserve fund, secured by residential real estate located in Brazil. The reserve fund also provides additional support for the Class A tranche, since there is no excess spread in this deal.

"It's a transaction in the form of a U.S. transaction. It has a senior subordinated piece and an equity piece," Posch said. Expected to be complete by the middle of November, Moody's has given the deal a preliminary national rating of Aa1.br.

"I think if it is launched properly, and we have the first securitization go out, and we subscribe it, and eventually Brazilian investors buy it, then you've launched the market," said Victor Moscoso, senior investment officer for the IIC. "At one point, the objective is that the IIC will cease to be in the middle and the market will manage itself."

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