A mega-deal collateralizing deduc-tible personal loans has been filed with Brazilian regulators, giving a jolt to a market that had slowed since a banner 2006.

Senior shares in the receivable investment fund (FIDC) total R$1 billion ($603 million), nearly equaling all the issuance from the asset class in 2007. Volumes dropped last year when the sector's main originators - medium and small banks - glommed onto cheaper funding elsewhere.

Banco Finasa BMC, the originator of the upcoming transaction, registered the deal as a one-off and not a shelf, a source close to the deal said.

The bank's gluttonous appetite for ABS funding is more interesting in light of the fact that leading player Banco Bradesco purchased BMC last year, opening the door to a relatively attractive source of lending for the originator. As of December 2007, BMC had total assets of R$3.6 billion, as compared with R$341 billion for Bradesco.

The senior piece of the BMC transaction has a tenor of 72 months, and is rated Baa2' on the global local currency scale of Moody's Investors Service. The national scale rating - the one that domestic investors generally follow - is Aaa.br.' Subordinated shares amount to R$176.4 million, and are unrated.

It appears that Bradesco has leveraged its status as the originator's owner to generate business for some of its units. The structurer is Banco Bradesco BBI; the trustee is BEM DTVM - a wholly owned Bradesco unit; and Bradesco is doing the double honor of master and back-up servicing. A call to Bradesco wasn't returned as of press time.

Backing the transaction are loans that BMC grants to retirees and pensioners receiving social security payments from the government. Loan payments are automatically deducted from the social security checks, and can't exceed 20% of that income. Rules cap the interest charged on social security-linked loans at 2.5% a month, which translates into an annualized 34.4%. BMC charges this ceiling on most its social-security linked loans. While high, the rate seems less exorbitant when judged against a Central Bank base rate that presently stands at 11.75%.

Monthly origination of social security-linked deductible loans averaged R$68 million between February 2005 and November 2007, according to Moody's. A graph in the agency's presale representing origination trends showed the figure dropping off significantly from over R$100 million in November of last year, but it was unclear whether the trend was temporary. A Moody's analyst didn't return a call for comment as of press time.

A popular asset class, payroll deductible loans have fallen under tighter scrutiny over the past several months as certain practices in the highly competitive industry have come to light. While sector-wide performance remains healthy, observers have pointed out how the prepayment and refinancing of these loans could eat into credit enhancement (ASR, 4/28/08). For instance, some deals have originators restructuring loans to lengthen out their terms in order for the monthly payments to stay within the borrower's allowable margin. This, of course, can erode the flows going into a deal.

In 2005, BMC launched an auto loan receivable investment fund capped at R$500 million.

While deductible loans are springing back into action, there's renewed chatter in the Brazilian market regarding the securitization of past-due, or re-performing, taxes. Back in 2004, there was talk that the city of Belo Horizonte was coming out with a deal collateralizing this asset class, which basically consists of unpaid individual or corporate taxes that have been renegotiated with the government. The transaction never surfaced, but in 2005 Banco Rio Grande do Sul led an asset-backed debenture for Caixa de Administracao da Divida Publica (Cadip), which manages the debt for the state of Rio Grande do Sul. The obligors in the pool - companies that pay taxes to that state - were drawn from wide array of industries.

While there's been a lull since the Cadip deal three years ago, players are again talking up the viability of this asset class. One Sao Paulo-based source said that players are trying to sell foreign investors on the virtues of re-performing taxes. One big question mark looming over this sector is the incentive for the government agency in question to keep servicing it after the assets have been offloaded onto a trust or separate vehicle. "These structures don't allow you to move away from servicer quality," a source said.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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