On the way in Brazil is a deal that will introduce local investors in receivables investment funds (FIDCs) to the concept of principal protection. The transaction is an eight-year fund, with senior shares amounting to R$200 million ($85 million) and a subordinated tranche of R$2.5 million. Moody's Investors Service has rated the senior piece Ba2' on the local currency global scale and Aa2.br' on the national scale, the latter typically used by domestic investors.

The rating mirrors that of the zero-coupon, eight-year bond or bonds that will provide principal protection to the deal. That bond will most likely be a single issue from Santander Leasing, according to a source close to the deal. Apart from the zero-coupon notes, proceeds from the shares will go to purchase equity in private companies, a specialty of Eccelera Administradora de Fundos, which is managing the equity-based transaction portfolio.

In a scenario presented by Moody's in its research report, R$67.7 million of eight-year zero coupon notes yielding 14.5% would need to be purchased to fully cover the R$200 million in senior shares at maturity.

Banco Itau is the master and back-up servicer on the transacton and Oliveira Trust is the fund manger. Banco Banif will assist in distributing the shares, according to a source.

While the quality of the equity portfolio shouldn't have a bearing on the deal's creditworthiness - it is, after all, the principal protection that is being rated - there are certain criteria to which Eccelera has agreed. Concentration limits, for instance, include a 30% cap on companies in media and entertainment; 30% in telecommunications; 50% in retail; 50% in consumer goods; and 40% in technology.

The transaction has no obligation to distribute equity gains as interest payments to investors until the fifth year, when those gains must trickle down to investors after all other payments in the waterfall structure, according to a source. The transaction doesn't stipulate a defined promise to pay off a particular level of interest on the senior shares, Moody's pointed out in a report. The promise is, instead, based on the pass through of available cash flows.

FIDCs do not pay any taxes on their investment portfolios, which in this case would include the accreted portion of the collateralized zero-coupon notes.

Currently before local regulators, the transaction should be ready to launch in about two weeks, said a source close to the deal.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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