As the EURO261.2 million Cabral transaction, the first CDO to include Portuguese assets, is expected to price this week, the spotlight is turning on the securitization market in Portugal. The adoption of a securitization law in 1999 was followed by a disappointing year in 2000, but expectations are high for 2001.

The Cabral transaction, arranged by Credit Suisse First Boston, represents a securitization of a static pool of mainly Euro bonds and Portuguese bonds. The transaction is carved into two portions, with EURO219 million rated triple-A by Moody's Investors Service and Fitch. Price talk on the triple-A part is three-month Libor plus 45bp-49bp. The deal is expected to price at the end of the range.

New issuance volume dropped to EURO762 million of total term deal issuance in 2000 after the impressive EURO1.4 billion achieved in 1999. Only four transactions came to the market in 2000, of which two were repeat transactions, as companies were awaiting the new legal framework to be put in place. None of the four transactions were structured under the new securitization law.

Volumes are expected to recover in 2001, with ABS as the backbone of the securitization market again. "We expect existing originators to return to the market in 2001 to refinance growing portfolios, or to securitize new asset classes, primarily in real estate or any type of CDO," says Marie-Jeanne Kerschkamp, analyst at Moody's. Since the mid-1990s, consumer finance has been an area of rapid growth for many Portuguese institutions. The asset base available for securitization is large and many institutions have pressing needs with respect to capital relief and refinancing.

Oscar Sanz-Paris, an associate at Credit Suisse First Boston, expects a boom in the Portuguese ABS market. Repeat issues of existing consumer-finance deals will add to the volume as their revolving periods come to an end, but the majority of deals will come from new asset classes. The largest deals are expected in the mortgage sector, but CDOs are expected to come to the market earlier following the Cabral transaction. "Most portfolio managers are faced with the situation of having good but illiquid underlying assets and will increasingly be interested in CDO transactions to gain leverage", Sanz-Paris says.

Clarification needed

Portuguese decree-law 453/99 established the legal framework for securitization vehicles, and defined assets to be securitized and assignment mechanisms to be used. However, sources say that it left uncertainties that call for additional legislation to be implemented. The tax regime circulated a draft law in 2000 that might have clarified some of these uncertainties, but it was never promulgated. However, the Bank of Portugal issued notices to resolve other issues.

The decree-law 453/99 created two types of entities that can be used for the purpose of securitization: credit securitization funds (fundos de titularizaco de creditos); and credit securitization companies (sociedades de titularizaco de creditos), that can be regarded as conventional special-purpose entities (SPEs).

Some issues still need to be clarified before the new law can effectively be implemented. For instance, the law does not clearly exclude the execution of transactions under the old regime, which is based on the Civil Code. Confirmation is awaited also on whether credit securitization companies will not be required to have a minimum of two years legal existence to be able to issue bonds, an exception to the common rule in Portugal. This does not apply to bonds rated A or above. The draft law included further exceptions.

Another clarification sorely needed is the fiscal regime applicable to either Portuguese or foreign investors buying bonds issued by credit securitization companies or units issued by fundos. The fiscal authorities need to confirm that the withholding tax legislation would not apply to foreign investors. Previously, foreign investors were required to pay a 20% withholding tax on interest payments received and this deterred many underwriters from managing asset-backed issues for Portuguese companies.

However, Sanz-Paris downplays the effect of legal uncertainties: "The timing is right for a boom for securitization in Portugal: the originators have enough interests to push forward transactions and the regulators are keen to promote securitization. The basic framework has opened enough room for banks to play around it."

"Many companies are waiting to assess the new tax treatment which is to be adopted within the next six months by the government," says William Smithson, partner of Grupo Legal Portugus/Simmons & Simmons. "However, four or five MBS mandates have already been awarded. We are working on several and are looking at alternative structures to go around the tax uncertainties," adds Smithson.

Securitization is a relatively new financial product in the Portuguese debt market. The first public transaction supported by Portuguese assets closed in June 1998 - Nova No. 1 Ltd., with Banco Comercial Portugues S.A. as originator. From 1998 to 1999, the market was relatively active, with underlying assets always consumer-finance receivables, primarily auto-related.

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