The enthusiasm for covered bonds in Latin America was palpable at SiLAS 2010, but challenges, both big and small, still remain for the birth of this product in the major markets of the region.
If these hurdles can be cleared, the potential could be huge, attendees said.
In Western Europe the market has already reached
One of the main bottlenecks to fostering a viable covered bond market is identifying the banks that would be the potential issuers, said Christian Corcino, vice president of global markets at Deutsche Bank Securities. He pointed out that the largest banks in Latin America can typically borrow at the lowest rates in their respective markets, while on the cross-border side the banks are normally at the sovereign rating ceiling, so there's no incentive to get uplift.
On the other hand, the duration match for issuers is certainly an appealing draw. The cross-border potential is stronger for some markets as well. In Peru, for instance, half the mortgage stock is in dollars, making them a natural match for a dollar bond, even though the borrowers themselves might face currency risk that would either have to be stomached by investors or hedged in some way.
Covered bonds are on the lips of players in Mexico, although not everyone finds them a pressing topic. "It's not a hot issue yet in Mexico," said Oscar Franco Lopez, the president of AmAfore, the trade group for Mexican pension fund managers, which in total oversees Ps1.3 trillion ($101 billion) in assets.
As with nearly any new financial product with the potential to become commonplace, liquidity, regulations and transparency need to be addressed before covered bonds can get started.
In particular, the regulatory framework in Mexico isn't ready yet, participants said. Peru, in contrast, appears to be closer to having regulations enacted (see ASR, May 2010).
Even though the product may not be around the corner in Mexico, local investors are likely to embrace it once it materializes. One of the big reasons for that is that the first issuer to step up to the plate will likely be market darling Infonavit.
The Mexican congress is currently looking at a proposal that would lift the prohibition on Infonavit to issue debt on balance sheet. "This could be important because Infonavit remains an important reference" for other issuers, said Lopez. "This could be the catalyst for this kind of asset to prosper in Mexico."
As a government agency, Infonavit has been one of the few issuers of housing-related assets to remain active throughout the crisis. The agency hit its financing goals in both 2008 and 2009.