Region already has its own homegrown variety

Well-established in Europe, covered bonds are being talked about in Central America as a potential vehicle for cross-border funding. The lower costs associated with this structure as compared with outright securitization could be a strong draw for originators in the region, sources said. "It dispenses with the headache of the true sale of the assets, the stamp tax and other expenses," said a banker familiar with the region.

To be sure, the concept is familiar to originators in countries like Panama and El Salvador. Global Bank Corporation and Banistmo in Panama, for instance, have placed issues that closely resemble the mortgage-related covered bonds mushrooming across the Atlantic.

Global Bank has issued three bonds in the domestic market that are backed by loans to retirees, which remain on its balance sheet. Loan payments are charged directly to the country's social security system, which sharply cuts risk. In the event of a default, a designated trust takes control of the collateral. "It's clearly established in Panamanian law," said Erick Campos, an analyst for Fitch Ratings, which has assessed these deals.

In the transactions issued so far, overcollateralization often hovers around 140%. Deals backed with "ringfenced" assets in this manner generally enjoy national-scale ratings that are several notches above the originator.

Thanks in large part to a dollarized economy, Panama has banks that are investment grade, piercing the ceiling of the sovereign. This is crucial to the success of a cross-border issue of covered bonds, which may not provide the same ratings boost on the global scale as would a true sale of the designated assets.

Other transactions that look

like Europe's covered bonds have sprung up in El Salvador. In the domestic market, Banco Cuscatlan has issued about US$170 million worth of paper guaranteed by mortgages, according to Marco Mendoza, financial manager of the bank. Typically the pool of ringfenced mortgages equals about 125% of the issue, he said. The deals tend to have maturities of between five and ten years. One of the prime drivers of these transactions in El Salvador, as opposed to an MBS, is the lack of a securitization law. "We could do MBS internationally, but not at the local level," Mendoza said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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