Brazilian ABS has stayed afloat as its counterparts in more developed markets dive and drown in lemming-like numbers.
Issuance in South America's giant actually rose last year, and the quality of the main asset classes hasn't meaningfully deteriorated.
But these deals may not be as buoyant as they once were, as concerns rise on the servicing front and originators are likely to become less inclined to substitute assets.
For future deals, the high-interest rate environment, despite a 100 basis-point cut in the key interest rate last Wednesday, will remain a major stumbling block.
Placements of shares in receivable investment funds (FIDCs) - the de rigueur vehicle for ABS in Brazil's domestic market - reached in the ballpark of R$20 billion ($8.6 billion) last year, according to preliminary figures from local financial consultancy Uqbar. That's up 48% from the roughly R$13.5 issued in 2007.
Uqbar's numbers exclude FIDCs arranged by oil mega-producer Petrolero Brasileiro and related companies, which remain in-house and accounted for a whopping percentage of issued deals in 2008.
Notwithstanding the numbers, domestic transactions are starting to feel the strain from a frazzled financial sector. One area of concern is servicing, particularly in the asset class of payroll-deductible payroll loans, but also in auto loans.
Payroll deductible loans comprise a sector popular among small-and-medium banks that have seized the opportunity to capitalize on lending to retirees and employees of government agencies. Payments are automatically deducted from paychecks and pension checks, making it an asset class with an extra layer of security. What's more, in times of job uncertainty, government employees and retirees are expected to fare better than those working in the private sector, sources said.
But this doesn't soften the blow suffered by servicers over the past few months. Some of the small and medium-sized banks that service self-originated deals have seen their creditworthiness deteriorate as funding sources dry up. In a bid to shore up such banks' balance sheets, the Central Bank has facilitated the sale of their loan portfolios to larger banks and also purchased assets directly, but for some of the banks in question this hasn't done the trick. The talk now is of banks pulling out of the business altogether, as Banco Maxima has reportedly done.
Regardless of whether this happens, the new possibility that the weaker of these banks will go under or endure some kind of disruption prompted Moody's Investors Service last week to put eight loan-backed deals on Review for Possible Downgrade. "The major reason for the downgrade review is the importance of the servicers," said Norton Bastos, assistant vice-president at the rating agency.
The Moody's action affects transactions originated by Banco BMG, Banco Cruzeiro do Sul, Banco Bonsuceso and Intermedium.
Apart from originators servicing their own deals, backup servicers aren't in the equation. Bastos pointed to two main problems should there be a disruption in a primary servicer's operations. One is commingling risk. "You could have money trapped in the bank, given that they have two to three days to forward the payments to the FIDCs," Bastos said. In a bankruptcy scenario, the money could be trapped in the bank for months, he added. The second overarching problem is the fragmented sources of payment in each transaction. "It would be major work to go to each paying entity and inform them of the new servicer," Bastos said.
Because this industry of small and medium banks originating payroll deductible loans is relatively young, there isn't a history of what happens to servicing when a bank goes under.
The issues with servicing extend beyond deductible loans. Fitch Ratings has had the 'AA(bra)' rating on a deal backed by used car loans on Negative Watch since late October. The originator, Banco Credibel, pulled out of auto financing in September, a major catalyst for Fitch's negative move. In tandem with this shift in strategy, the bank has cut servicing personnel, the agency said in a report. While Credibel has said it will continue to perform servicing functions, the agency noted that it has less incentive to do so since it withdrew from new lending.
This is a concern dogging other deals in the sector.
But even with the woes facing small and medium Brazilian banks, most deals are performing well, according to Juan de Mollein, managing director at Standard & Poor's, which rates a number of transactions backed by payroll deductible loans in Brazil.
"We haven't seen any problems in servicing yet," he said. While acknowledging that the banks in the sector were having trouble funding their operations, de Mollein added that a drop in the creditworthiness of an originator wouldn't necessarily hurt its servicer capability.
Uqbar Partner Chuck Spragins said that notions of servicer issues as a potential hazard for ABS in Brazil were overblown. He added that the fact that subordinated tranches in most deals were held by their own originators generated a strong incentive for that servicer to continue performing its functions effectively.
Spragins does not see much risk that major banks in the sector will pull out of payroll deductible lending. Banco Maxima, in some ways, was a special case. "Maxima was late to get into it and then decided the competition was too much," he added. "Then they want back to the middle-market, corporate credits."
To be sure, the fact that the transactions do not have a backup servicer per se does not seem to be a cause for concern, given the other roles in a standard FIDC. The custodian of the deals is typically a third party company not involved in the origination. "The custodian controls the payment flows," de Mollein said. In addition, any acquisition into the collateral has to be approved by the custodian and the fund manager, which basically functions as a trustee, he added.
While some servicers of revolving deals in Brazil substitute assets that may be delinquent, none of the rating agencies give credit to these substitutions. Still, the reason for the substitutions isn't always clear even to players that have access to transaction documents, sources said. Brazil's S.E.C., the Comissao de Valores Mobiliarios (CVM), plans to require more public disclosure of certain aspects of FIDC servicing, sources said. Until then, however, investors may not be privy to information crucial to their understanding of the genuine creditworthiness of a transaction.
On the auto loan front, aside from the particular issue with Credibel, there is a general expectation that delinquencies will rise along with the maturities of the transactions. Bastos added that the length of some used-car loans in ABS could end up being more of a drag on creditworthiness because of their relatively long lives. "There is a concern that you have loans that are six-seven years for used cars," he added. "That's just too much time to finance second-hand cars." Still, the figures don't reflect any problems yet.
The resilience of a number of outstanding Brazilian deals and fairly active registration of FIDCs with the CVM over the past few months do not necessarily spell success on the issuance front. Steep interest rates have always proven a headache for more esoteric investments in the country, but the recent rise in risk aversion has pushed ever more investors into domestic treasurys and even time deposits in large banks.
The investment funds tracked by the National Association of Investment Banks (Anbid) saw a drop in their portfolios to R$1.19 billion in October from R$1.07 billion in May, according to Brazilian finance magazine Capital Aberto. While the 10% drop is paltry compared to what other countries have suffered in the same time frame, it has no doubt had a chilling effect on the more non-traditional investment instruments, sources said.
The Fundo Garantidor de Credito (FGC), akin to the Federal Deposit Insurance Corp., has taken a more active role in shoring up small and medium banks, many of which have been active in securitization. There is even talk that the FGC is buying up tranches of FIDCs. A number of recent registrations with the CVM have been unrated and mostly private, an indication that the market isn't their final destination. It's possible Brazil has set up its own version of the ABS-supporting facilities set up by the U.S. Treasury and the European Central Bank.
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