Starved for funds, Argentine farmers have bundled their resources into a trust that could herald the return of reasonable financing for a critical economic sector. The talk in Buenos Aires had initially tipped Banco de Rio as the first bank this year to land a deal backed by agricultural loans, but now it seems HSBC is in the race, according to sources (see ASR 10/11, p.15). HSBC did not return phone calls seeking comment as of press time.

The collateral is funding for producers, who in turn will sell their goods to a handful of exporters for marketing abroad. HSBC's deal is sized at US$10 million and is actually denominated in U.S. currency, a bold step following the much-maligned pesification of assets and liabilities in the local economy. Fitch Ratings has rated the 8-month transaction A3 on the short-term national scale.

The deal is split between a US$7 million senior piece and a US$3 billion unrated subordinated tranche. The latter will be bought by the large exporters involved. "They know they'll be able to sell the goods, so they're comfortable with the risk," said a source familiar with the transaction.

The trust is constituted locally, which means it will be subject to Argentine law. For that reason alone, foreign investors would probably find it about as palatable as radioactive waste. But for now, Argentine transactions can afford to ignore the crossborder and stay local, since pension funds are thirsty for paper in the parched market.

But winning over the domestic funds on this particular deal may be an uphill battle. One Argentine source away from the transaction said that investors might shy away from a securitization that drips with HSBC risk, as the structuring agent, loans backing the deal and even an insurance policy extended to producers are all in the bank family.

The collateral is comprised of loans that HSBC will extend to roughly 150 agricultural producers around the time of closing, sources said. The bulk of the funds will go to soy farmers, with corn and sunflower seed producers taking the rest. Overall, the funds will cover an estimated 60% of the direct production costs. The average rate on the loans is 13%. Price talk has the transaction closing near 8%.

In return for the loans, producers are pledging production from certain plots to the trust. Mitigating the risk are forward contracts that the producers hold with the large exporting firms, among them Cargill, LouisDreyfus, and Aceitera General Deheza (AGD).

HSBC will hand the participating producers 20% of the funds upfront in cash. The other 80% will be drawn from letters provided to suppliers.

More cushioning comes from an insurance policy provided by La Buenos Aires Compania de Seguro, an affiliate of HSBC. The policy offsets losses if production levels fall below a pre-established threshold due to climatic stress, including drought, flooding, hail, strong wind, snow and fire from lightning.

Though the deal is denominated in dollars, it will be paid out in pesos in full at the maturity date. First Trust of New York is the trustee.

While HSBC starts to nibble on commodities, the appetite among pension funds for another, simultaneous securitization by the bank is flagging, according to sources. The Ps35 million (US$9.8 million) CLO has been refashioned once to get a higher BBB+' national scale rating (see ASR 10/14, p.16). Now it's heard to be on the shelf, with the bank refusing to cough up more money to boost the rating yet again.

"They'd rather wait for the climate to clear up before issuing," said a source familiar with the transaction, referring to Argentina's long-winded talks with the International Monetary Fund (IMF). "They don't want to go out with this and get burned."

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