Shaking up the dead calm in structured issues from Brazil, Voto-Votorantim Overseas Trading Operations IV - a special purpose company wholly owned by Votorantim Participacoes - floated a $400 million, 15-year bond backed by a letter of credit from Credit Suisse First Boston, which also was the sole lead. The transaction priced last week at 7.75% or 369 basis points over Treasurys.

Fitch Ratings and Standard & Poor's rated the deal BBB' and BBB-', respectively.

Votorantim Participacoes is the holding company of the Votorantim Group, a Brazilian conglomerate with financial and industrial interests that extend into cement, metals, banking, pulp and paper, and chemicals, among other businesses. The deal is understood to be the longest dated bond ever placed by the group abroad.

Votorantim Participacoes and units Votorantim Celulose E Papel, a pulp and paper producer, and Cimento Rio Branco, a cement maker, have all provided payment guarantys on the notes. While the holding company has provided a full guaranty, the subsidiaries are adding protection only up to 50% of the outstanding volume of the paper.

The deal's other enhancement, CSFB's letter of credit, acts like political risk insurance (PRI). It covers currency inconvertibility, which refers to government-imposed capital controls that would block the issuer from exchanging local currency to U.S. dollars or taking dollars outside Brazil. This protection lasts for periods of eighteen months of interest, equal to three bond payments.

Proceeds from the transaction are marked to pay back existing short-term debt, said a source close to the deal. The industrial division of the group had roughly $1.4 billion of short-term debt on a consolidated basis as of December 31, 2004. The issuing vehicle has a $400 million 8.5% bond maturing Monday and a $250 million 5.75% bond due Tuesday.

Last year, the conglomerate issued a $300 million, 10-year bond via its Votorantim Overseas Trading Operations III vehicle.

While Fitch has rated corporate PRI deals in the past, it doesn't rate any PRI transactions from emerging market banks, as the agency sees that sector as too exposed to sovereign risk to justify a meaningful ratings uplift from such a policy. In the case of the Votorantim deal, Fitch pointed out that the group's banking businesses are small in proportion to its other interests and incur only "moderate" risk through their link to the Brazilian banking system and the sovereign.

The Votorantim transaction is the first PRI-backed deal from emerging markets this year, according to a source familiar with the sector. Turkiye Vakiflar Bankasi (Vakifbank) had planned, for the spring, a transaction backed by political risk insurance provided by Sovereign, a joint venture between Ace Bermuda Insurance and XL Insurance. Led by ABN AMRO, Citigroup Global Markets and JPMorgan Securities, the Vakifbank deal never came out, said a source familiar with the transaction. Moody's Investors Service, which had given the transaction a preliminary rating of Baa2', withdrew the rating in May, according to the agency website. While shying away from the PRI market, Vakifbank just last week emerged with a voluminous deal backed by diversified payment rights (see story p.21).

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

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