Deutsche Banc Alex Brown and Credit Suisse First Boston recently launched MSF Funding LLC, a groundbreaking securitization of Brazilian medical leases for MSF Holding, a medical equipment leasing and finance specialist operating in Latin America.

The transaction is Brazil's first contract-backed cross-border securitization and its first securitization of existing onshore contracts to be rated above the sovereign ceiling. It is also the first ABS deal to feature an insurance policy from the Multilateral Investment Guarantee Agency.

The $80 million deal is being marketed as a private placement and is expected to close later this month.

The notes were rated by Moody's Investors Service, Standard & Poor's and Fitch. The A class notes received an A2 rating from Moody's and an A rating from the other two agencies. The B class notes were rated Baa2 by Moody's and triple-B by S&P and Fitch and the C class received Ba3 and B ratings.

Pricing for the A class notes was 275 basis points over Treasuries, while the B and C chunks priced at 375 over and 700 over respectively.

"The deal involves the basic premise of doing a U.S. transaction," explained Gary Kochubka from S&P in New York. "The transaction's underwriting process is very comparable to a U.S. deal, and so are the type of borrowers that it targets. However, it is located in Brazil, which has a B rating-risk environment (Brazil's foreign currency rating is B-plus and its local currency rating is BB). So we had to take into consideration factors such as a devaluation of the real, the imposition of currency restrictions, etc."

The agencies based their ratings on the high levels of overcollateralization (35% for the Class A notes) that could cover debt service under various stress scenarios, on the availability of various reserve accounts, on the credit quality of the assets supporting the notes and on the MIGA policy.

The MIGA policy protects against transfer restrictions (the ability to convert local currency into U.S. dollars or to transfer those funds outside of Brazil) and expropriations of the issuer's bank accounts in Brazil. However, the insurance does not cover the risk of devaluation of the local currency nor is it a guarantee of payment on the notes or contracts. This is because payment from the insurance policy is not immediate and unconditional.

Upon a monetary restriction event, MIGA's policy covers up to $90 million, which is sufficient to pay for all of the outstanding principal and interest due on the class A, B and C notes.

This deal is the first to feature such a policy from the multilateral, but sources expect to see more MIGA-backed transactions in the future. "The coverage was designed specifically for this transaction," said a source familiar with the agency. "But MIGA is seeking to expand its coverage and it is very likely that they will come up with a standardized policy for the capital markets similar to OPIC's."

Another strong factor in the transaction is the fact that DVI International, a wholly owned subsidiary of U.S.-based DVI Inc. (a frequent issuer of ABS deals), and the International Finance Corp. are among MSF Holding's shareholders.

In fact, some sources felt that MSF Holding decided to go with MIGA's insurance policy as opposed to more established policies such as OPIC's because of the IFC's stake in the company.

Also important was the financial strength of the private medical sector within Brazil, where the leased equipment is used. "The obligors are reimbursed through private insurance companies," explained Kochubka. "And those insurers are diversified and leaders in the market."

The deal had been in the works for quite some time (ASRI 12/31/99 p.1). "It took very long to put together," said a source familiar with the transaction. "They had to get the rating agencies lined up and comfortable and do some marketing to investors to make sure that there was an appetite for the paper."

Through its subsidiaries Medical Systems Finance S.A. and Healthcare Systems Finance S.A., MSF Holding provides cross-border lease and loan financing to private sector hospitals, clinics and physician groups throughout Latin America for the acquisition of high-technology diagnostic imaging and radiation therapy equipment.

The company is now said to be looking at its Mexican assets for a future issuance. "This was a relatively small transaction but one that required a lot of work," said an analyst at Fitch. "So it makes sense that the company will want to continue using the structure as a funding vehicle in the future."

The transaction's success, along with an improved regulatory climate, will boost Brazilian securitization, experts added.

"Recent structured finance reforms in Brazil are facilitating that country's entry into the securitization market and several potential issuers are voicing plans to begin securitizing a range of assets," said Brigitte Posch, a structured finance analyst in Moody's Latin America team.

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