On the sidelines of the 3rd Annual Latin American Securitization Summit, there was talk among the Brazilians about mining a new asset class: renegotiated, past-due taxes owed to municipalities and states. "This could be a huge market," said one banker, who estimated that the state of Sao Paulo alone has R$5 billion (US$1.6 billion) in receivables. "Every municipality, state, and even the federal government has a massive stock of these receivables," he added.

In Brazil, individuals and other taxable entities that are delinquent on any number of government taxes can renegotiate the sum and pay in installments. The collector on the payments remains the government.

The city of Belo Horizonte, located in the southeastern state of Minas Gerais, is understood to have mandated Banco Fibra to structure a receivables investment fund (FIDC) backed by past-due taxes. Other originators - notably Rio de Janeiro - have tried and failed to execute a deal in this class. One reason: a lack of detectable interest among investors. But Belo Horizonte has a good shot because the municipality has shrewdly paired the fund with a tantalizing contract for a single would-be investor. The city will hand all its collections, including the payroll operations for thousands of state employees, to the retail bank that pledges to purchase FIDCs backed by the municipality's past-due taxes, a source said.

Hungry for new customers, retail banks are listening the Belo Horizonte's pitch.

The winner "would be paying for the exclusivity, the database of potential new clients," a source said. If the city succeeds in cracking the asset class open, it will also boost the business of FIDC-structuring among smaller players. Banco Fibra won the contract to execute the deal in part because, as a small bank, it would not be competing for the collections contract, according to a source. That was done in order to avoid a conflict of interest and subsequent issuers might go the same route.

Apart from their high risk - subordination in any given deal would likely reach 50% - past-due taxes are fraught with legal complexities that have yet to be entirely sorted out.

For one thing, it is not entirely clear whether they are still considered taxes, which would make them untouchable under existing legislation. Most seem to think that they are credits and so are securitizable. "The prevailing [legal] opinion is that they're not taxes anymore," said one lawyer. "Legally speaking, I think it's feasible."

Overall, participants felt that the fundamentals of the Brazilian market were auspicious for the continued growth of the FIDCs, though the recent volatility has spurred fears that high-flying interest rates would stop coming down.

Alexandre Zakia, senior managing director of Banco Itau, projected that the FIDCs issued would reach US$1.6 billion by the end of the year. "We believe there are 30 new funds in the pipeline," he said.

In terms of volume, real estate receivables deals known as CRIs will continue to lag behind, according to participants. The lack of standardization, among a number of obstacles, still precludes the formation of large MBS. Respectably sized transactions backed by rental contracts will keep trickling into the market, however.

Pioneered by Banco Santander, that industry got started in 2002, with a deal that had Volkswagen as an obligor. Others followed, with big names behind them such as Nestle and Telesp Celular.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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