In the face of yet another Argentine sovereign downgrade last week - this time to the unthinkable D' for default, from Standard and Poor's - the number of Latin American securitized transactions in the pipeline is surprisingly robust, reaching into the double digits, sources say.
Moreover, several deals are expected to close by year-end - with investment-grade ratings.
"It's been awhile since we've been up in the double digits with investment-grade deals in the cube," said a Fitch analyst. "Every one of those deals should be able to get done; we'll just see if they actually do get done."
For instance, Brazil, the country that has been slammed hardest by the Argentine contagion, seems to be a securitization machine these days. Its pulp-and-paper company, Aeracruz, has been in the market for the last two or three years trying to close a deal, though now with a wrap from XL Capital, it is marked to close by year-end. The Brazilian banks - Banco Itau, Unibanco and Banco do Brasil - are also expected to bring their deals to market before the start of the new year.
Similarly, Southern Peru Copper's $500 million export-receivables transaction via Banc of America and Dresdner Bank is also slotted for this year. PDVSA is also in the ring, hoping to close along with Petrobras - which is wrapped by MBIA, Ambac and XL Capital - by year-end.
Granted, PDVSA is currently pricing at 450 over Treasurys, which speaks to investors' current tastes for taking risks. "It seems like investors are demanding a little more - 450 over seems like a little bit of a high price to pay for a single-A-minus or a triple-B-plus, depending on who's rating it," said another LatAm analyst. "These are spreads that we haven't seen..."
And finally, newcomers to the structured finance arena south of the border are El Salvador's Banco Cuscatlan and Banco Agricola, which are slated to add to the recent phenomenon of MT100 deals. "It's hotter than it's been in the last six months," said the Fitch analyst.
Bondholders lose
While sovereign researchers are not completely certain about what is causing the structured finance realm to flourish amid economic distress in the region, some hypothesize that industries are vigorously looking for an alternate source of funding during hard times. Another analyst contends that it could simply be that the securitization bug' is truly catching on.
Either way, it is certain that last week's developments in Argentina will have dramatic effects on all Latin American markets, and may even stall certain deals that are slated to be offered.
After the International Monetary Fund (IMF) followed through with the expected refusal to bail the country out one more time, President Fernando de la Rua announced his restructuring plan, and as predicted, both S&P and Fitch view that plan as an Argentine default. S&P downgraded the sovereign rating to SD for selective default from double-C, and Fitch lowered the rating to single-C from double-C last week.
"Investors are going to be paid less than they were when they entered into the contract with the Republic," said Bruno Boccarra, sovereign analyst at S&P. "We view that as a default - it's a distressed situation."
According to sources, the losses to bondholders could reach $26 billion. Assuming that Argentina adheres to its zero-deficit policy, the country's debt service burden coming due in 2002 is about $28 billion, and Fitch said at least $10 billion is required in order to finance that debt.
The President's latest restructuring plan entails another debt swap in which it will be exchanging debt for lower net present value. Argentina has already completed three sovereign debt swaps this year, though none of them have been considered defaults. Previously, Morgan Harting, a sovereign analyst at Fitch, told ASR, "We didn't define any of them as a default because they were all voluntary - bondholders could make their own decisions about whether it made sense for them and whether it was economically advantageous" (see ASR 10/22/01).
Over the past two months, Argentina has slid further and further down the rating scale and rating agencies have cited government delays in transferring tax revenues to the provinces, an economic recession, and rising interest rates as some of the causes.
With the changing dynamics and increasing pressure in Argentina, the restructuring plan is an attempt to salvage the country. "The government hopes it can ride out the crisis, but the odds are stacked against them," said Boccarra. "The focus is to prevent it from worsening and to maintain control. Part of the solution is this plan." Will that be enough? Market sources say it's uncertain.
