A much anticipated receivables-backed deal from Brazil's largest exporter, Companhia Vale do Rio Doce (CVRD), has landed investment-grade ratings that are higher than Brazil's sovereign ratings from both Standard & Poor's Ratings Services and Fitch IBCA.
CVRD, an exporter of iron ore and pellets, has structured the seven-year, $300 million export receivables-backed transaction as a sale of product from CVRD to its subsidiary, CVRD Overseas Ltd., based in the Cayman Islands. CVRD Finance, a bankruptcy remote special purpose vehicle, will act as the servicer in the deal, mandated nearly two years ago but was shelved temporarily because of market conditions. Collateral backing the transaction will include six designated customers, which accounts for 30% of CVRD's total exports.
"There haven't been a lot of these deals done in Brazil," said Nancy Giganti Chu of S&P. "It is one of the strongest coming out of Brazil in a long time. It's unique in that it is one of the only transactions that is investment grade that doesn't have the multinational parent company support."
S&P rated the uninsured future-flow export securtization notes BBB-minus, four notches higher than the sovereign rating of B-plus. In addition, the insured notes have been given the rating of AAA, the result of a surety wrap from MBIA Insurance Corp.
Like S&P, Fitch has also rated the insured notes AAA. However, Fitch has assigned a BBB-plus rating to the uninsured notes, five notches higher than its current sovereign rating of BB-minus. According to Patrick Kearns of Fitch, the discrepancy in the ratings from S&P and Fitch is merely a result of different approaches. "On the face, there is a mixed message, but there is a difference in methodology," he said.
With a mix of $125 million wrapped and $175 million unwrapped tranches, the deal will appear more attractive to an array of investors. "CVRD wanted to tap both the wrapped and unwrapped markets," said Ron Dadina, director of future-flow group for MBIA. "It gives them a wider range of investors."
Dadina believes this is a typical future-flow transaction and MBIA chose to back the deal because, "CVRD meets our standards. We are comfortable with the fundamentals of CVRD, as well as the fundamentals of the industry."
In the past, the Brazilian government has been able to maintain tight control over the flow of dollars in the country. However, Brazil is currently moving in the direction of less intervention and is therefore reducing those controls.
This, in conjunction with the location of CVRD Overseas - which is expected to mitigate the impact of sovereign intervention - enabled S&P and Fitch to rate the deal higher than the sovereign rating. In addition, as the country's largest source of foreign currency cash flow, it appears CVRD would remain stable in the event Brazil should default on its own obligations.
Unlike other future-flow transactions, the structure of the deal is somewhat distinct in that in its deal the risk falls on the investors rather than on CVRD. According to sources close to the deal, CVRD was legally prohibited to structure the deal any other way.
CVRD represents 17% of Brazil's exports and is the largest exporter of iron ore in the world, with a 22% market share. In addition to the strength of the company, other factors contributing to the transaction's ratings include the company's history of increased revenues and its ability to maintain steady net cash flow from operations, despite stressful times.
The transaction also provides strong overcollateralization levels, according to S&P, and the minimum debt service coverage over the term of the transaction is expected to be 4.4 times. The included reserve account to cover debt-service for the next scheduled payment date, has also provided additional security for the deal.
