Brazil's domestic securitization market has fallen victim to a combination of the summer doldrums and potential management changes at state pension funds engineered by the new presidential administration. Dealmakers are either moving forward at a snail's pace or waiting until the end of February. "We don't expect to see very much before March," said a source at one Brazilian securitizer.

On the MBS front, activity should pick up slightly from last year, observers say. Local securitizer Brazilian Securities is readying a small deal, with a senior tranche worth R$7.59 million (US$2.1 million) and rated Aa1.br' on the national scale by Moody's Investors Service. The agency has R$49 million (US$14 million) in MBS issuance under its belt and aims to bring its latest deal to the market in about a month, said a source on the deal. Official price talk is 12% plus the IGPM inflation index, the same rate as the previous handful of deals executed by Brazilian Securities. The subordinated piece enjoys a 30% credit enhancement, consisting of 22.5% subordination from an unrated subordinated tranche and 7.5% in residual certificates.

Brascan Imobiliaria and Rossi Residencial are the originators for the lion's share of collateral. The LTVs ratios are higher for this pool than for the securitizer's previous transactions, a weakness that has been offset by the hefty subordination. Moody's gave a Aa1.br' rating to four deals that Brazilian Securities closed in 2001 and 2002.

Though it has no concrete deal currently in the works, rival securitizer Companhia Brasileira de Securitizacao (Cibrasec) expects to issue about R$200 million (US$56 million) in MBS this year. To date the agency has placed eleven mortgage deals worth about R$360 million (US$100 million), including the country's largest residential MBS last year, sized at R$54 million (US$15 million).

The collateral for about R$200 million (US$56 million) of Cibrasec's outstanding bonds are loans generated by Caixa Economica Federal, a colossal state bank set up in the 1970s to provide housing finance. Due to legal complexities and other hurdles to securitizing mortgages, only a drop of Caixa's mortgage pool has been securitized. Last year alone, Caixa extended 212,000 mortgages, amounting to a total of R$2.6 billion (US$725 million).

With the relatively recent cut in the CPMF financial transaction tax on securitizations, at least one obstacle has been lowered, said one Brazilian source. Clearer legislation on the true sale of assets would be another impetus, sources say. Yet no one expects explosive changes on the MBS front within the next several months.

Elsewhere in the Brazilian market, receivables investment funds, touted as the next big thing several months ago, have yet to see the light of day. In the works are two of these transactions, known as FIDCs. One is FMAX, a five-year, R$136 million (US$38 million) bond backed by consumer loans. Rated Aaa.br' by Moody's, FMAX hit a brambly patch due to the untested nature of the legal structure. "It's taken a while to get everyone on the same page," said Patricia Bentes, Hampton's managing director. Motta, Fernandes Rocha is legal counsel on the transaction.

The sales team has detected somewhat dispersed interest in the deal, Bentes said. As such, instead of a bookbuilding process, the fund will simply be opened on a given day with shares sold at 115% of the benchmark CDI interest rate. "We were getting many different offers without any real logic," Bentes said. Timing is not yet fixed. Moody's rated the deal Aaa.br' on the national scale and Baa2' on the local currency global scale.

Meanwhile, Banco BMG has structured and originated an FIDC backed by personal loans to state employees. That deal will launch and close in a single day, with an offering price of 300 basis points over CDI, according to a source familiar with the deal. Stand-alone agency Atlantic Rating has rated the R$75 million (US$21 million) senior tranche of the deal AAA' on the national scale. The transaction includes a R$25 million (US$7.0 million) subordinated piece. Levy & Salomao is legal counsel.

Stalled for now, both FIDCs are being closely watched by the market. The structure carries some tax advantages over conventional trusts. In a traditional securitization featuring the true the sale of assets, the SPV is subject to value-added taxes on top of a marginal income tax and the CPMF. FIDCs are exempt from the CPMF. Tax treatment also differs between closed and open-ended funds (For further details on FIDCs see ASR 11/18/02, p.20).

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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