Brazil was a locus of hope for participants at the Securitization and Structured Finance in Latin America (SiLAS) conference organized by Euromoney Seminars and LatinFinance, as the economy keeps growing apace and sectors such as infrastructure and energy, among others, have an enormous appetite for funding.
But the bubble forming in consumer finance and certain property markets was also a topic of conversation.
"We're reviewing our exposure to high yield in Brazil," said Jorge Unda, chief investment officer at BBVA Bancomer Asset Management, based in Mexico. "We're doing it at a slow pace because there's still a lot of potential." But the signs nonetheless point to the "beginning" of a possible bubble, he added.
In the consumer finance sector, heady growth in credit is still a cause for caution. "Most of the growth in debt is at the individual level," said Greg Kabance, managing director at Fitch Ratings. "If you look at the debt-to-income ratio, it is increasing."
Delinquencies have risen in the kinds of consumer loans that are sold to securitized pools, and players have been warning of potentially deteriorating underwriting standards with lenders aggressively courting new borrowers.
It is that tier of lender - the second and third tier of banks that have depended on securitization to expand their base - that has some participants concerned. There are still lingering doubts over the sustainability of the sector's business model after Banco PanAmericano, an originator that had been active in securitizing consumer loans, was discovered by authorities late last year to be overstating assets.
"There will be some deterioration [and] the originate-to-securitize model will suffer as it did in other markets," said Standard & Poor's Managing Director Juan De Mollein.
Fitch's Kabance also sees potential trouble in factoring-related securitization. The agency had warned a few months ago that factoring companies in Brazil - typically privately held businesses that buy trade receivables from a variety of companies at a discount - were basically turning their operations into securitization machines. As non-regulated institutions, the factoring companies have been transferring a host of risks into their ABS deals.
Blind pools and thinly capitalized companies are two of the main hazards in this sector.
But ultimately, Kabance said, knowledge of the generalities of these sectors cannot replace thorough due diligence. "Whether there's a bubble in these sectors is less important than digging into each transaction," he added.
There seems to be a consensus that the danger these pockets of booming growth might pose for Brazil's overall economy is far more limited than what the mortgage sector wrought in the U.S. Consumer indebtedness is still much lower than in developed markets.
Still, even with Brazilian mortgages at 3% of GDP and the sector's incursion into capital markets funding almost nonexistent, it is tough to ignore the fact that property prices in Rio and Sao Paulo have doubled since 2008.
BBVA's Unda sees the bubble mentality at work in the hotel prices of the country's financial capital. "Let me put it his way: If you go to Brazil and you stay in a decent hotel, you'll pay between $300 and $400," he said. "If you stay in the same class of hotel in Mexico, you'll pay $130, so something is going on in Sao Paulo."
