The securitization arm of Chile's Banco Bice expects to go out with its second placement of paper backed by globals from Empresa Nacional de Electricidad (Endesa Chile) before mid September, said a source familiar with the transaction. The deal is denominated in inflation-indexed units (UF), while the asset is a 7.75% dollar-denominated 08. The size of the issue is 750,000 UF (US$17.5 million). "It's already cleared regulators and now it's being considered by the (official) risk classification agency," the source said. Domestic bonds receive their final stamp of approval from the risk classification agency, which assesses the mandated two ratings attached to each deal. Bice's bond is rated AA' on the national scale by Moody's Investors Service affiliate Humphreys and Fitch.
This will mark Bice's second issue of UF bonds backed by Endesa Chile's 08s. The first came out in early May and priced at a real 6.18%. Though domestic interest rates have fallen since then as the Central Bank clings to a lax monetary policy, Bice's deal may not automatically reap the benefits. One of the reasons is investor nervousness over Endesa Chile's prospects, given its exposure to other Latin American countries. Though the impending securitization has the same double-A national-scale rating as the original deal, investors are finding it tough to ignore the widened spread on Endesa Chile's globals. Over the last three months, Endesa Chile's bonds have flared out roughly 250 to 275 basis points to 450 to 475 basis points over Treasurys, according to one New York-based corporate EM trader. "It's a function of the Lat-Am trouble in general," he said. There are US$400 million outstanding of Endesa Chile's 7.75% 08s.
Roughly half of Endesa Chile's operating income comes from Latin American countries outside its home base, including units such as Emgesa in Colombia and Cachoeira de Dourada in Brazil. "The question is what will happen in Brazil and how does it affect Endesa," said Jason Todd, director of Latin American power ratings at Fitch. However, Todd doesn't see the risks strong enough for now to dislodge the credit from its BBB+' global foreign currency rating, with stable outlook.
The analogous ratings from Moody's and Standards & Poor's are Baa1'/downgrade watch and BBB+'/negative outlook, respectively.
Investors will be looking at other variables as well. "The question we're asking is whether we want to increase our marginal risk in Endesa through bonds or stocks," said the official of a Chilean pension fund that spurned the first issue in May because of the tight yield. Another consideration is whether Enersis, Endesa Chile's parent, is looking into any issuance. "We've heard they might do something like that and though it's not the same risk, it would affect Endesa's spread," the official said.
Working in the deal's favor is the fact that local investors are prohibited from holding overseas corporate bonds in their portfolios. This pent-up demand helped compress the yield on the original issue. And the payments are in local currency, matching pension funds' revenue stream.
Bice will carry out a cross currency swap for the full amount of the issue to eliminate its own currency risk in holding the underlying asset. Payments on the UF bond coincide with the asset, starting Jan. 19, 2003 and occurring twice yearly. Principal is paid in full at maturity.