Having spent years without seeing a dime for certain services rendered, Brazil's Construtora Andrade Gutierrez (AG) has gone ahead and securitized those payment flows.
The money stems from a debt recognition agreement between the sizable construction company and high-profile client the municipality of Belo Horizonte, the capital of Minas Gerais state in southeast Brazil.
The deal resembles a fairly vibrant segment, the collateralization of precatorios - court-ordered payments that the government at any level must make to a given creditor. But in this case the collateral stems from an agreement and does not originate in a judicial decision. The transaction does, however, take place against a backdrop of legal snags.
Led by Unibanco, the long-windedly named FIDC Nao Padronizados Obras Civis de BH is a receivable investment fund. The senior shares amount to R$230 million ($147 million), with a tenor of 72 months. Moody's Investors Service rates the six-year series âAa3.br' on the national scale and âBa2' on the local currency, global scale. A negligible subordinated chunk of R$4 million, also with a six-year maturity, is unrated.
The underlying receivables for the transaction, credit rights from an agreement signed in January 1999, have a rocky history. The agreement sets out a schedule of payments for infrastructure work that AG completed for Belo Horizonte between 1979 and 1987. Apart from the fact that the payments are for projects that are decades old, there have been payments renegotiated yet again in 2004 and 2005. But most of the payments have been made as originally set forth in the agreement.
"They mutually agreed to these renegotiations," said Norton Bastos, assistant vice president at Moody's. "It could become a precatorio only if Belo Horizonte refuses to pay."
The transaction has also faced legal challenge in the form of a public class-action suit seeking to invalidate the debt agreement signed in 1999. A local politician was behind the suit, according to Bastos. Lower appellate courts dismissed the case, but it could be appealed.
Each annual payment is for R$16.3 million, corrected upward by the wholesale inflation index IGPM and a 9% yearly interest rate. Payments on the shares will mirror the timetable. The amount will bear an interest rate determined by book building.
AG's business lines include the construction of hydroelectric and thermoelectric power plants, petrochemical plants and oil refineries, highways, airports, tunnels, overpasses, ports and related work in Brazil and abroad. The company's assets totaled R$4.89 billion in December 2007.
Moody's rates Belo Horizonte âAa2.br' and âBa1', a notch higher than the respective rungs of the AG transaction. The debt backing the transaction ranks pari passu with the municipality's other debt obligations.
The transaction could serve as a blueprint for future deals backed by renegotiated debt between service providers and sub-sovereign governments in Brazil. "I would guess that construction companies would carefully study a transaction like this," Bastos said. For local institutional investors, instruments bearing state and municipal risk are hard to come by, as the law prohibits these entities from issuing bonds directly.
Meanwhile, in the precatorio asset class, while public issuance hasn't provided much to talk about, there have been private transactions, both unrated and rated by local agencies such Austin Rating and SR Rating. "They're mostly focused on federal government precatorios," said Jayme Bartling, senior director of structured finance at Fitch Ratings in Sao Paolo. "They're moving forward, but not necessarily into the debt capital markets."
And not all these deals are done via FIDCs. In some cases the precatorios are sold directly to the investors, which are often offshore hedge funds.
Precatorios are typically generated after a drawn-out legal battle in which the government in question challenges an alleged debt and loses the case in court. Banco do Brasil, Deutsche Bank and Standard Bank are among the players that led precatorio-backed deals in the market since early 2007.
Overall, higher interest rates are dampening the appetite for structured deals among Brazilian investors. Asset managers would prefer to keep their money parked in yieldy time deposits than roll the dice with an ABS that might not offer much pick-up. Two weeks ago, Brazil's Central Bank jacked up the country's reference interest rate by 75 basis points to 13%. That's on top of 100 basis points earlier this year. The move, and expectations of more to come, complicates selling any fixed-income instrument to a market that can reap such high returns from a no-frills deposit.
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