As Latin American issuers search for easier and cheaper funding methods, the asset-backed commercial paper conduit market has erupted, becoming the preferred mechanism for issuance - and many market participants are unaware of its existence.
While term deals appear to be a rather lackluster market throughout Latin America, conduits seem to be somewhat of a well-kept secret in the trendy-type funding arena. "This form of financing has been around for many years, but we've seen its use for emerging markets increase significantly since the second half of last year," said Kevin Kime, director of structured finance ratings from Standard & Poor's.
Surprisingly, many sources had no idea that this market was such a viable source for Latin American issuers. "Conduit asset placements are usually anonymous, so the banks and the people who run them don't necessarily want people to know what assets are in them - they just want people to know that the conduit liabilities are double-A or triple-A rated assets," Kime added. "It's supposed to be discreet."
Even with the insurance premium for a wrap, conduits are, in many ways, a better source for Latin American issuers to get the funding they need. "[Conduits are] cheaper; the investment banker doesn't have to do a road show for the deal because he's putting it into a conduit," Kime added. "It's quicker to execute and it's easier in a lot of ways. In addition, the conduit mechanism allows emerging market issuers to tap an entirely different investor base beyond the traditional high-yield group. A number of banks have found this a very attractive way to place paper from emerging markets."
Market players
The market began to pick up last year, as insurance premiums decreased with the entry of XL Capital into the market and the demise of the MBIA and Ambac joint venture. Sources say that increased competition among bond insurers and investment bank underwriters has also helped to spin the conduit sector.
Most recently, Banco Nac-ional de Mexico (Banamex) announced the launch of a new two-year program which will allow it to issue up to $500 million of U.S. commercial paper. Barclays Bank Plc. has a Prime-1 rating from Moody's Investors Service, and as a result, the commercial paper issued from the program is rated above investment grade. Moody's also assigned the same Prime-1 rating to the program.
"Dozens of these get done all the time. Banamex has done a number of these letter-of-credit-backed LOC programs; as have a lot of LatAm banks," said Sam Pilcer, managing director of the structured finance group at Moody's.
Additionally, there are an increasing number of deals that are being privately placed and are ultimately winding up in conduits. "Many of these deals were initially done in the U.S. capital markets by private placements or 144A fundings; they do the volatile deals in emerging markets," said Ron Dadina, director at MBIA. "I believe that compared to two or three years ago, there are more deals which are going straight into the asset-backed commercial paper conduits."
Cheaper, easier and quicker
As far as term deals, it seems to be common industry knowledge that they are rather expensive and somewhat difficult to place in the Latin American market - there were a total of 10 cross-border issuances last year. However, conduits allow the same transactions to come to market in a different way.
"Instead of selling the deal to an array of investors globally, what they'll do is obtain a wrap to bring it up to the double-A or the triple-A [rating] that's needed for the asset to be put into a conduit," Kime said. "The conduit is then funded with commercial paper backed by the wrapped assets, on a rolling basis."
Term deals a dying breed?
As a result of the movement toward the conduit sector, a few sources believe that there has been a slowdown in the Latin American term deal market. One analyst went so far as to say, "It's actually dying down, somewhat."
However, that is not to say that the term deal market is going out of business. But some sources argued that it's all the same market - the mechanisms are simply different.
"You go to the market directly, or you can go indirectly through a conduit and then sell the commercial paper," Kime said.
Conduits attract a variety of investors and expand the scope to commercial paper investors as well as the emerging market securitization investors. A broader investor base makes it easier for more deals to come to market.
Observers agree that the conduit market will probably continue to grow, provided that bond insurers have an appetite for emerging-market creditors and banks maintain a willingness to provide letters of credit. Additionally, growth is dependent upon whether there are limitations or restrictions placed upon the conduits.
"It's definitely the favored mechanism right now," Kime noted.
