Until quite recently, Chile's young securitization industry clung to the real estate sector, churning out bonds that were backed by either residential mortgages or housing lease contracts. But maturing investors, savvier structuring agents and lack of regulatory obstacles are broadening the scope of securitizable assets. "We expect greater developments in the domestic market," said Gerardo Spoerer, CEO of BCI Securitizadora, the agency expected to debut the country's first credit-card backed deal within the next few months (See ASR 8/26 p 15).
It was only in 1999 that amendments to the initially restrictive Securities Law enabled securitizations beyond mortgages, according to a report by Fitch Ratings. Apart from a dollar-denominated treasury-backed deal in late 2000, Chile's local market had not seen a single securitization of an asset outside the real estate sector until Santander Securitizadora priced a US$52 million-equivalent deal backed by Chilean global 2009s on Jan. 7, 2002 (See chart, p. 32). Since then, securitizers have fanned out into other products.
This year has seen securitizations of car loans and cross-currency deals backed with global 2008s from Empresa Nacional de Electricidad (See Bice story on p 22). Right behind BCI's credit-card backed deal in the pipeline is another credit-card backed bond structured by BanChile Securitizadora, talked at the equivalent of US$22.8 million and due out before the end of the year.
Others are in the works as well. "A lot of securitizers are looking at revolving deals backed by service accounts," said Gonzalo Prieto, deputy head of administration and finances at Bice Securitizadora. Potential assets are telephone- and cable-account receivables.
Chilean securitizers are also sniffing around the cross-border bond market after the success of Santander and Bice in executing cross-currency securitizations of global bonds. But the structure is tricky. "There's a pretty steep risk and a problem with liquidity," said an industry source looking into securitizing foreign Chilean bonds. "In addition, the market here isn't interested in anything longer than four or five years; there's no interest for something pushing 15." That contrasts with local corporate deals, which often target insurance companies with deals beyond 20 years.
Despite the obstacles, arbitrage opportunities in securitizing foreign bonds are indisputable in the current market climate. Domestic Chilean rates are at historical lows; the interbank lending rate is actually negative in real terms by some estimates. Meanwhile, a number of cross-border bonds are suffering from flared-out spreads thanks to Argentine exposure or simple contagion. If securitizers get the cross-currency swap right, arbitraging between the interest rates can be a lucrative proposition.
And while poor liquidity remains a hurdle, some Chilean cross-border bonds apart from the sovereign globals and Endesa paper may have enough of a market to whet securitizers' appetites. Among the better-known credits traded abroad are power company HQI Transelec and mining behemoth Codelco.
HQI Transelec, noted one New York-based trader, is trading 50 basis points outside the sovereign, although they both have the same rating of Baa1'/A-' from Standard & Poors and Moody's Investor Service. Salomon Smith Barney and ABN Amro jointly brought a US$465 million, 10-year issue from Transelec to market in April of 2001 to yield 309 basis points over Treasurys.
Another development in Chilean securitizations is the impending introduction of debt denominated in nominal pesos, instead of inflation-indexed units (UF). To date, all securitizations save two have been in UF, reflecting the vast majority of debt issuance in general. The upcoming credit-card securitizations - denominated in nominal pesos to match the revenue stream of the asset - will change that.
"Given the [low] levels of inflation, there exists the potential to generate a market in [nominal] pesos," said Aldo Reyes, a director at Moody's Chilean affiliate Humphreys. Indeed, the Central Bank is boosting its issuance of fixed-rate paper, presumably in part to create benchmarks for local issuers. There is already talk that an upcoming securitization of a cross-border bond may be denominated in nominal pesos.
Moving hand-in-hand with these developments is the buyside's growing ease with securitizations beyond MBS, according to Antonio Siri, investment manager at life insurance company Bice Vida Compania de Seguros. In addition to a growing appetite among pension funds and insurance companies, banks, mutual funds and brokerages are getting in on the act. Stunningly tight interest rates have also acted as a powerful magnet for spread products, including securitizations. Widening spreads paired with plunging yields attest to that trend (See Bice story on p 22).
Quick to adapt, ratings agencies are also growing more sophisticated in their analyses. "From our point of view, coordinating with Moody's is much more relevant with securitized bonds," said Humphreys' Reyes. Other sources concur that new securitizations have spurred the local ratings agencies to work closer with their respective parents, who have experience in the more advanced U.S. market.
On the regulatory front, sources from all corners of the Chilean market agree that legislation is nimble enough to handle new securitizations. Securities regulators "have shown clear signs that they are supporting the deepening of the market," said BCI's Spoerer.
Though the local market still lacks depth, the incentives to stay home still outweigh those supporting foreign issuance. "There is not overwhelming pressure to place securities into the cross-border market," said a recent Fitch report. So for now, Chilean securizations will keep to pesos.