Heady growth in the domestic markets of Brazil and Mexico is forecast to spill over into next year, as many players once devoted to Latin America's cross-border market re-channel their energies into local currency deals.
Some interesting deals will no doubt pop into the cross-border arena in 2007, but in the number of transactions and the generalized bustle of investors, guarantors, multilaterals, and i-bankers, the heavy action's staying local.
Brazil, for one, is expected to draw more foreign players to its shores, especially in the white-hot arena of receivable investment funds (FIDCs). While the figures aren't in yet for full-year 2006, growth has been staggering by all accounts - well into the double digits, maybe even triple digits. For the first half of 2006, FIDC volumes shot up 28% from the same period last year, while those for the third quarter soared 126% year-on-year. All indicators point to further increases in 2007.
"We still expect the market to grow," said Pedro Gazoni, associate director of emerging market structured finance in the Sao Paulo office of Standard & Poor's. "Probably the most prominent asset classes in terms of volumes will continue to be payroll deduction loans and utility future flows."
Multi-asset and multi-seller funds could also materialize next year, sources said. What is more, the mortgage sector - long the sleeping giant of Brazil's securitization business - might finally be awakened.
"There's a huge amount of talk about the real estate market," said Chuck Spragin, a partner at Uqbar, a local consultancy specializing in securitization. A number of impediments to originating mortgages and pushing them off balance sheet have kept RMBS confined to miniscule transactions in the local market, but Spragin said steps are being taken to make the asset more securitization friendly.
On the cross-border front, future flow product from the country will likely be stuck in the same narrative loop, with high commodity prices and improved creditworthiness leading the traditional issuers among banks and exporters to shun structured finance. Infrastructure and housing, however, could nudge issuers to place deals abroad, sources said.
In Mexico, meanwhile, the domestic mortgage issuance will remain king, sources said. More banks will get into the act, which has until recently been the exclusive province of nonbank finance companies known as Sofols. CMBS should also come on stronger next year, one market source said.
Mexico could provide decent supply into the cross-border marketplace as well, sources said. "Banks there could do huge deals with different tranches - that's definitely a strong possibility," said one lawyer familiar with the country.
Having already won over many local, and some foreign, investors, the infrastructure and housing sectors in Mexico and perhaps in smaller Latin American countries might also generate cross-border issuance.
"That type of deal is the complete opposite of future flow transactions, in that people are willing to take the risk of an onshore asset," said Greg Kabance, director of Latin American structured finance at Fitch Ratings. He noted that cross-border investors snapped up onshore asset deals from Latin America this year with single B and double B ratings, a pattern that could easily be repeated in 2007.
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