MIAMI, Fla. - While local securitization markets in Latin America race ahead of the cross-
border in terms of the number of deals and even in volume, they carry their own endemic risks. One major beef expressed at Euromoney's Securitization in Latin America Summit is the premium exacted by domestic investors on structured deals over plain vanilla bonds. "Issuers are able to get better terms on a straight basis than on a securitized basis," said one banker attending the conference. "Often local investors don't have the need to look for alternative structures."
This holds true for countries like Mexico, Chile and Brazil. In the case of Chile, a handful of pension funds wield extraordinary pricing power and often come down hard on the more complicated structured deals. "People don't necessarily associate less yield with lower risk, so there's a tendency among all the pension funds to follow the leader," said Jonathan Lieberman, senior managing director at Bear Stearns. "With MBS or structured paper you're trying to get it as highly rated as possible to sell it at the lowest possible yield. But if government bonds are higher yielding, they'll buy treasuries."
The liquidity premium is particularly harsh on the structured sector in Latin America. In a number of markets, a few corporates and government treasuries crowd out structured deals. The relative illiquidity of securitizations make them even less palatable to the buyside.
The national ratings scale can be another deterrent for foreign players to get involved domestically. Local deals are rated on a relative scale with the government perched at the triple-A pinnacle, regardless of its foreign and local currency ratings on the global scale. That can reduce the appetite for insurers and other guarantors to come in and boost a deal's rating. "Local investors don't differentiate between a local triple-A and an international triple-A," said Gabriel Torres, director at XL Capital Assurance (XLCA), "So it's difficult for them to give us too much credit."
Despite these obstacles, domestic markets are growing fast and will continue to eclipse the crossborder arena. "We believe that investors are increasingly looking to structured finance locally," said Michael Lucente, director of the Latin America structured finance group at Merrill Lynch. "We're expanding our local market capability in Mexico."
Other bankers and insurers at the summit said they were keen on extending their domestic reach into Mexico and Chile. Colombia remains a borderline case, even though the domestic market continues to churn out esoteric deals well received by sophisticated local investors. Argentina and Brazil, meanwhile, were off the radar of most folks, at least for the immediate future. In Brazil, a number of players are waiting for president-elect Jose Inacio Lula da Silva to appoint a finance minister and other members of his economic team. Only then will they consider working on deals.
Domestic investors are expected to come around to the idea that a structured deal should price tighter than a plain vanilla bond or even some local treasuries, according to attendants of the summit. "In time investors will realize the value," XL's Torres said.