Those driven mad by a cow securitization program in Colombia might soon regain their sanity. The 20th and last series, sized at about Ps6 billion (US$2.2 million), is likely to pay out in full in a couple of months despite severe trauma, according to sources.

What's more, lead investment bank Commodities y Banca de Inversion (CBI) has set next month to launch a new cattle-head program with features designed to correct problems with the first, including roving devices to track poached collateral. The upcoming transactions will also have a different trustee and operator, the latter role akin to a servicer. "We've developed an entire new deal with fundamental changes," said Jorge Munoz, the president of CBI.

The original program threw the market for a loop last year when cattle poachers and surreptitious sales by at least one originator took a serious bite into the collateral (see ASR 10/6, p. 1). With no insurance policy to cover bad faith by originators, the deal was promptly taken down by standalone agency BRC Investor Services and Fitch Ratings affiliate Duff & Phelps in the third quarter. The agencies downgraded the deal yet again in the fourth quarter, citing continued losses in the cattle herds. As of February, BRC and Duff had series 20 at BRC4' and DP4', respectively, on the national scale yanking the deal from investment grade.

In a report, BRC noted that the operator, Cebar, was letting too much time elapse between surveillance reports. "This gave originators the opportunity to dispose of assets owned by the trust in ways that were not contemplated by the [SPV] contract," the agency said. Even after some originators showed that they could not be trusted or were lax in preventing their workers from culling the herds, more cattle went missing. Branding the designated assets with the trust insignia turned out to be hardly a deterrent.

Local authorities have imposed fines on the guilty originators, but they don't appear to have stopped the illicit sales, according to sources.

"This was a learning process for all of us," said Patricia Gomez, senior analyst at Duff & Phelps. "It reminded us that there are risks that are very hard to mitigate."

It is those risks that Commodities y Banca de Inversion is tackling in the upcoming deal. In a crucial move, the structurer will sign a contract with the trustee that effectively covers holes in seller integrity or, as Munoz put it, "moral risk."

In addition, CBI has replaced trustee FiduColombia with Fiduagraria and more importantly, swapped operator Cebar with Operadora Agroindustrial y Ganadera de Colombia. The previous operator was unable to meet the servicing demands of the busy program, according to Munoz. "They didn't have the capacity to grow," he added.

As mentioned, the looming program will have another high-tech feature designed to improve surveillance. Each bovine will be fitted with a microchip, enabling the operator to monitor any stolen animals.

While questions of originator integrity resonate in other industries in Colombia and beyond, there are features of the cattle sector that make it particularly vulnerable. "It's a fairly informal market," said Carolina Castellano, a broker for investment bank Mercancias y Valores. "And in the case of [the current] deal, the assets remained in the hands of the cattle owners." She suggested that companies that own cattle and operate on the basis of clearly defined contracts would be easier to manage than a fractured collection of independent ranch owners. This is not a problem in other areas of the farm sector, Castellano said (see bananas below). The trade groups that loom large for some products, for instance, tend to make surveillance much easier.

Trouble for the cattle deal came from another corner as well. The supermarket chains that were the major purchasers of the beef would often pay a few months after receiving product. The delay hit some of the series hard, since they each had a maturity of a year. "This was something that wasn't foreseen, but is being taken into account in the next deal," Duff & Phelps' Gomez said.

Timing issues also pressured some cattle owners to fatten their livestock too quickly. The upcoming program will issue bonds with maturities of 18 months in addition to 12 months.

It may seem curious that another deal is already on the horizon, considering how damaged the last one is. But Colombian investors are a hearty lot. Sources noted that the pension funds that originally bought into the deal have stayed put. The yield on all the series was 300 basis points over the benchmark DTF rate. This has translated to an effective annual yield of 11%.

Banana republic meets

high finance

Meanwhile, the peel is coming off a banana deal in Colombia. Mercancias y Valores is close to securing the regulatory nod on a roughly Ps20 billion (US$7.5 million), five-year transaction backed by future sales contracts between originator Manati and Grupo Comercializadora Sociedades Unidas (Sunisa), which owns a stake in the seller. Processed food powerhouse Del Monte markets the product abroad. "We're hoping to have it approved shortly," said Mercancias' Castellano.

The architecture resembles that of a sugar deal that Mercancias closed for refiner Incauca in May of last year. The banana deal is backed by a healthy overcollateralization, with the value of the contracts projected at Ps31 billion (US$11 million). Three different funds add further security to the deal, which has already obtained a AAA' preliminary rating on the national scale by BRC. One of the funds will collect flows for amortization starting in the first year, even though the principal does not start paying down until the end of the third year. Mercancias has not yet selected a brokerage to place the paper.

Toll roads up ahead

In other Colombian news, a few tollroad deals are expected in the coming months, according to Mateo Leon, an analyst at Duff & Phelps. "There are projects that are nearing the end of their construction phase and this is when they'll finance a syndicate loan with a securitization," Leon said. Already four such projects have issued future flow transactions, he said. Their volumes tend to be middling, ranging from Ps30 billion to Ps60 billion (US$11 million to US$22 million).

This contrasts with such markets as Chile and Mexico, where toll-road bonds are the bulkiest deals, thanks to the sector's ravenous appetite for capital. Last year in Mexico, for instance, toll-road concessionaire Pacsa put out the largest structured deal, sopping up US$450 million from the market. The deal outweighed the next largest securitization by more than US$200 million. Mateo expects deals in Colombia to eventually grow in size, perhaps reaching over US$50 million in pesos. But that, he added, won't happen anytime soon. "The concessions themselves tend to be smaller here," he said.

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