In Latin America, a region where securitizations are still fraught with inappropriate legal frameworks, insufficient volume to construct transactions and unfavorable market conditions, Argentina's ABS activity is a breath fresh of air.
Though its stature as a cross-border issuer is still dwarfed by the multi-billion dollar offerings from oil giants Petroleos de Venezuela (PDVSA) and Petroleos de Mexico (Pemex), the country has one of the most active, diversified and mature local markets.
Despite the deep recession of 1999, the volume of local deals tripled, reaching an impressive $1.5 billion, and market pros expect these volumes to grow significantly in the next five years.
"Things are happening according to our expectations," said Fernando Pesci, head of distribution at MBA Inversiones S.A., a local investment bank. "We predicted a market that would grow slowly but steadily and that's what happened. We now have a wide array of issuers and assets in the market and, although the volume of the deals is still small, we now have a track record."
A Bustling Local Market
Following the victory of Fernando de la Rua - a candidate who vowed to continue pegging the local currency to the dollar - in the October presidential elections, the Argentine local market gained momentum. Since then Citibank launched bond-repackaging deals and Banco Bansud securitized auto loans. In addition, Banco Velox and Banco Privado de Inversiones launched securitizations of loans and deferred checks respectively.
"Most of the Latin market is characterized by future-flow transactions, but Argentine securitizations have developed in a different direction," said Jorge Solari, senior analyst with Standard & Poor's in Buenos Aires.
"The local market has seen over 120 deals done with existing assets so far. All the transactions have performed well overtime and we now have a consolidated market with a lot of potential, which is something that most other countries in the region are still struggling with."
The most prevalent structure that investors have demanded is one in which a financial trust issues bullet notes in the Argentine market where principal is fully guaranteed and interest is linked to the variation of a market index or the price of a bond. Stripping of government bonds, stock indices, or formulas that combine several indices, plus market interest rates or different formulas that link prices and indices, give investors a new and diversified range of investment opportunities.
Argentine provinces such as Tucuman and Santiago del Estero, which started accessing the capital markets in 1997 to refinance their debts, have continued to securitize the co-participation taxes they receive from the federal government. However, official drafts to amend the coparticipation law are currently under discussion among the governors and the Ministry of Economy. Some sources suggested that an overhaul of the tax system, combined with the generally poor state of some provinces' finances, could affect outstanding securitizations backed by coparticipation tax-revenues. Others feel that these fears are overblown.
As for the direction of the market this year, some believe that there will be attempts to structure deals with less credit enhancement and higher yields. Other mused on the most likely assets to be securitized this year. "I believe that we'll see a lot more deals done with consumer loans, credit cards and future flows," said a banker in Buenos Aires. "But above all I think that activity for 2000 will be centered around performing and non-performing loans."
A Resilient Legal Framework
A securitization law, in place since 1995, provides incentives for issuers as well as legal protections for investors.
The framework was tested in 1998, when Banco Mayo, a local bank that acted as the servicer for six ABS deals, was suspended by the central bank.
This situation was new for the Argentine market and created uncertainty regarding the performance of Banco Mayo's ABS deals. However, the deals continued to perform as expected due to the provisions in the law that require independence between servicer and trustee, trustee due diligence and minimized commingling risk.
Banco Mayo's suspension gave the young and developing Argentine structured finance market the opportunity to prove for the first time in practice what was established theoretically by law. Specifically, it demonstrated that the structure of Banco Mayo's consumer loan-backed transactions effectively isolated investors from the insolvency of the bank that had acted as both originator and servicer of the loans.
If the legal structure of the transaction had not held up, investors' confidence in structured financing would have decreased and lower demand for these securities would have resulted in higher borrowing costs for Argentine issuers.
MBS: BHN Leads the Way
The fact that only 5% to 10% of Argentina's homeowners have mortgages creates a great need for securitization to act as a catalyst for mortgage lending. This potential was not lost on the government, which emerged as the major force behind the first issuance of MBS. The transaction was done through the then state-owned Banco Hipotecario Nacional S.A. (BHN).
BHN's mandate was to purchase, securitize and sell loans in the domestic and international capital markets, ultimately lowering housing costs.
Since 1996, the bank has been privatized and has issued over $700 million worth of peso and dollar denominated MBS. The most notable BHN transactions were its pioneering cross-border offerings. Almost four years after BHN I, its first cross-border deal, the bank recently closed BHN IV, bringing its dollar denominated issuance up to $450 million.
In addition, BHN recently teamed up with the International Financial Corp. (IFC) and local real-estate developer IRSA to create a secondary mortgage institution that will buy mortgage loans and package them into mortgage-backed securities.
"We expect a very positive response from all the players in the market," said Marcelo Icikson, director of capital markets at BHN. "Several banks have expressed interest in selling mortgages to the new company and local pension funds indicated that they would consider participating in mortgage securitization deals."
While mortgage loan documentation has been standardized and underwriting and servicing procedures are conforming more closely to those used in the U.S., the biggest problem facing the mortgage market is that there simply isn't enough origination to provide the raw materials for deals, sources said.
"BHN will be able to issue between $400 million and $500 million a year through the new secondary mortgage company, but no more than that," said a source from the structuring side. "Banco de Galicia has been planning a deal for a long time now and it's still uncertain when they will be in the market. Other than those two issuers I don't think we'll see other banks coming to market with MBS transactions."
Crossborder Deals Still Scarce
International deals out of Argentina, meanwhile, have been less frequent and more tied to the fluctuations in the economy.
Besides the BHN transactions, local airline Aerolineas Argentinas S.A. tapped foreign investors with three securitizations of ticket-receivables, and oil producer YPF closed a $225 million deal backed by oil receivables. In addition, four Argentine provinces have obtained $530 million in the international capital markets through deals backed by federal taxes and oil and gas royalties (two other provinces have raised $216 in the local market).
"The tendency in the last year or so has been to try to minimize political risks through the use of political insurance policies," said Jorge Solari.
"Several issuers such as Banco de Galicia y Buenos Aires and YPF tried to structure deals using political insurance. So far no such deals have come to market, but I think we might see some soon."
With an economy on the upturn, other issuers are likely to go international. "I've heard of several big financial institutions with large pools of assets who are mulling cross-border deals," said a source from the structuring side. "These players have the know-how and the volume and they might want to take advantage of the fact that foreign investors are familiar with the country. If the economy remains stable at a national and international level, there should be a couple of big deals in the market soon. It's just a matter of time."