While securitization is taking baby steps into the Latin American market, some countries in the region seem to be bulldozing ahead onto the next level with a flurry of collateralized bond obligation (CBO) proposals.
In recent months Standard & Poor's said it has been approached by various companies in Mexico for CBO deals; additionally, sources indicate that J.P. Morgan & Co. is also looking at similar transactions in Argentina.
According to Jose Ramn Tora of S&P, the various CBO proposals from Mexico have been a mix of cross-border and local deals.
However, the cross-border proposals have been denied as a result of transfer and convertibility risk. While S&P has rated Mexico's foreign currency BB+, there is still a sovereign risk involved with these transactions. "To get a higher rating in the international market, you have to provide more guarantees or more collateral. [If] the government doesn't let you send the money, that makes it a bit more difficult to structure a CBO/CLO out of Mexico," Tora said.
The problem with the local transactions is different. "The local capital market is still developing. So you have to deal with the investors understanding the risk. You have to be able to structure things in a way that is economical," Tora said.
Further, the interest rates are quite high. The Mexican government has implemented a floating interest rate and therefore, the interest rate can go up relatively fast, in turn costing the company more money for which they have to provide more collateral.
However, despite these issues, one source says, "The Mexican domestic market will probably be becoming more important. The Brazilian domestic market will probably start to develop too."
So when will the CBO market be well established in Mexico? "It's hard to tell," Tora noted. Firstly, deals take quite a bit of time in Mexico. Accordingly, Hipotecaria Su Casita S.A. de C.V, a Mexican residential loan servicer, has been trying to do a mortgage-backed security transaction for more than five years. "The structured market is being developed in Mexico as we speak," said Tora. He added, "There's been a few issues, more and more proposals, and investors are getting knowledgeable about how this structure works."
Unlike Mexico, a law was developed in Argentina in 1995 that laid the regulatory framework for securitization and Argentina has a relatively active market for asset type securitizations.
"Argentina has the most sophisticated securitization market in Latin America, especially internally," said a source from Moody's Investors Service. Although it might seem that Argentina is well on its way to entering the CBO market, it is important to note that Argentina is currently in a recession and it remains uncertain as to when this type of market may emerge.
On the other hand, the source also said, "I would say there are some banks that would like to do CBOs [in Argentina]." It has also been rumored that J.P. Morgan is looking at some CBO deals in the country.
While sources say Brazil will become more important in this market in the future, this is one Latin American country that seems to be lagging in the securitization market in comparison to Mexico and Argentina.
Brigitte Posch of Moody's says Brazil is expecting its first mortgage-backed securitization to close by the end of the month (see story p.1). According to Posch, the first securitization of trade receivables in Brazil occurred a month ago and it was a national deal. Merrill Lynch closed the $75.3 million securitization of export receivables for Brazilian refinery OPP Petroquimica S.A. which was marketed as a private placement and unrated. "I think that is something that we are going to see warming up there, in Brazil - national deals," said Posch.
There are a variety of economic and political issues as well as high interest rates imposed on securitization transactions that seem to be slowing the development of the securitization market in Brazil.
According to Valter Hiebert, market relations director of Brazil-based Cibrasec, at the moment Brazilian investors are more comfortable investing in short-term treasury bonds rather than long-term private bonds, because treasury bonds are much more liquid in the market. Cibrasec, formed in 1998, is currently the only mortgage securitization company in Brazil.
As a result of a law implemented in 1997 which provides more protection for investors, the foundation for real estate receivables was put in place and therefore, real estate has experienced the most maturity in Brazil.
Heibert believes the CBO market is also beginning to develop as well. "We have very good prospects. I don't think [CBO markets] will happen quickly, probably in a few years," said Hiebert. Like Mexico, deals move rather slowly in Brazil.
However, unlike real estate securitization, no law has been implemented for a CBO market in Brazil, and therefore, there appears to be no foundation for such a sector. "The [CBO] market is quite new. There probably will be a law for CBOs eventually, but I don't know when," said Hiebert. He also said in order for the CBO market to progress, the economy must be more stabilized.
"We think overall, more than talking about specific CBOs, there are many developed countries where this market has not happened yet, just because of the way the country is," S&P's Tora said. "They are not very interested or they just don't have a need. If you look at it more generally, as a structured finance market, there's going to be a development,".