The Brazilian state of Goias is readying a receivable investment fund (FIDC) backed by past due sales taxes, a fledgling asset class that has been tainted by a downgrade review from Moody's Investors Service on a separate transaction.

The senior tranche on the Goias deal is small, at R$9.7 million ($4.4 million), and the rating low, at B(bra)' from the national scale of Fitch Ratings. The term is also a short 14 months. The collateral consists of delinquent sales taxes that companies owe the state and have renegotiated into an installment plan. Goias is an inland state and the home of Brasilia, the capital.

The Moody's-rated transaction is a debenture secured by past-due taxes owed to Rio Grande do Sul state. In early March, the agency put its' national-scale rating on the $52 million deal on downgrade review. Originated by state-debt overseer Caixa de Administracao da Divida Publica, the deal matures in December.

The catalyst for the downgrade review was basically acceleration. There have been higher losses and higher refinancings because of tax amnesty, said a source close to the deal. In an attempt to raise funds, the state has allowed obligors to pay a percentage of their total debt up front. Any refinancing is considered a loss since the state doesn't put the amount into the structure's vehicle. The state has been substituting the re-paid collateral but the new collateral apparently doesn't have the same value.

A Moody's analyst declined to comment on when the review would be resolved.

The structuring agent for the deal was Oliveira Trust and lead manager was Banco do Rio Grade do Sul. Co-managers included Unibanco, Fator Bank, Banco ABC Brasil, and Banif.

This particular asset class is thorny in other ways as well. A source familiar with the sector pointed out that a company that has negotiated to pay its taxes over a three-year period can be given the opportunity to extend that to a much longer timeframe if a new administration comes in and offers that option. This naturally would be highly disruptive in a short- to medium-term deal that held those past due taxes as collateral.

Also, the source said there have been companies that have negotiated an installment plan for the sole purpose of obtaining funding - such as a bank credit line - that requires it be current on taxes. In these instances, once the funding is secured, the company simply defaults again.

Elsewhere, Brazilian bus manufacturer Marcopolo was timed to issue the first R$30 million from a total R$96 million of senior shares in an FIDC on July 21. Pricing is set at 140 basis points over CDI. Banco Bradesco will purchase all of the shares, as it has pledged to do for the entire program, said a source close the deal. He added that following each purchase, the bank might subsequently dole the shares out to its funds or sell them to clients. The deal is backed by vehicle loans from Marcopolo's own bank, Banco Moneo, which is snapping up the subordinated shares. The maturity is 60 months and the rating is AA-(bra)' from Fitch. Gainvest and Bradesco are joint arrangers on the deal.

Brazil's securities commission was holding back the Marcopolo FIDC because company officials had disclosed too much information about the transaction to the press prior to launch. Delayed approval from regulators came on July 12.

Marcopolo manufactures bus bodies under its namesake brand and the brands Ciferal and Volare.

Elsewhere in the market, talk is percolating that arranger Banco Votorantim is crafting a follow-up to an open-ended FIDC for BV Financeira launched on June 28, according to a market source. The rumored deal would amount to around R$1 billion and be closed-ended.

Otherwise the transaction will resemble the initial deal, which was backed by auto loans originated by BV Financeira. That transaction had senior shares totaling R$500 million, with a subordination of 20%. Pricing on the senior piece came to 101% of CDI, with a Moody's rating of' on the national scale.

Finally, Standard & Poor's reported that domestic issuance in Brazil's securitization market hit $2.1 billion in local currency over the first half of the year, a 99% jump from the same time frame last year. Full-year issuance could rise by 50% from last year, as long as the presidential elections in October don't muddy the macroeconomic picture, the report said.

The leading assets in the market have been consumer loans, with 29% of the total; trade receivables, with 26%; future flows, with 15%; and auto loans, with 10%.

ASR will publish a more thorough assessment of the activity in the Brazilian market over the second quarter in the next issue, with data provided by securitization consultancy Uqbar.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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