The latest innovative deal out of Latin America is finally fueling up - this time from the Dominican Republic - as six airports prepare to launch a $170 million securitization backed by airport revenues, a deal that has been in the works for more than a year. Interestingly, Italy-based Banca IMI is leading the transaction and Wings, as the deal is called, will feature credit enhancement from both the InterAmerican Development Bank (IDB) and XL Capital, the first time the IDB will provide credit enhancement to a wrapped deal.
Wings is being targeted for September; however, given the complexity of the transaction, a source familiar with the transaction said if it does not close by the target date, it would definitely close before year-end. The bank is working on the legal documentation that should be delivered to the originators soon, and some points of the deal are still being negotiated with XL, the source said.
The first of its kind deal is being targeted to European institutional investors. The IDB will provide a political risk insurance policy for $150 million. Why the IDB and XL are both involved in the transaction is rather puzzling to some market participants.
However, according to sources at Banca IMI, in order to get the wrap from XL, the deal needed to be at an investment-grade level. "We were starting with a double-Bminus rating for the Dominican Republic so we needed to get a political risk guarantee from the IDB to get to an investment-grade rating and then we decided to have the deal wrapped at a triple-A level with XL for various reasons," the source said.
A year in the making
Details began to surface around June 2001, a little over a year ago, and, according to sources close to the deal, it has been a hot and cold transaction. "It was worked on a lot last fall, then it got quiet. Then at the beginning of this year it was going full speed ahead and then it got kind of quiet again. In April [I heard] that they were going to try to close in May," one analyst said.
According to the bank, the complexity of the transaction has slowed its development. "It is based on the concession of the government, and the concession was changed at a certain point to include another airport; then we had Sept. 11, and other issues arose," the source said. "In general terms, it is a complex deal in itself and there are many parties involved - XL, the IDB and about six legal firms and two rating agencies - so that's why it's taking a long time." Standard & Poor's and Moody's Investors Service are rating Wings.
Not only is the deal interesting because of the credit enhancement provided by the IDB and XL, it is also one of just a few to come out of the Dominican Republic. In the past, there has only been a small handful of credit card voucher deals to surface from that country. "This is a really innovative deal, not only for the Dominican Republic, but the region as a whole," a market analyst said. "What's interesting is that they have so many airports in the deal."
Additionally, a market source close to the deal said the Italian underwriter involved in the transaction adds another level of uniqueness to the deal, as most of the transactions in Latin American or Caribbean ABS have U.S. underwriters. Banca IMI has never done a capital markets-structured deal in the region, and how they became involved in the transaction is uncertain. "They were the only ones proposing a capital markets structure as opposed to an AB loan or a project finance type of structure," the source following the development said. "The IDB and the clients liked the idea of issuing a project bond in the capital markets."
Banca IMI primarily focuses on Italy and Europe and is not planning to establish a larger, long-term presence in Latin America or the Caribbean, although it does have an existing small presence in the region with offices in Argentina and Chile. "If there is a chance for a transaction of this type in Latin America, we are going to do it," a source from the bank said. There are project finance employees working in the existing Banca IMI offices in the region, which the banker said they would be working with to find new opportunities in the area.
More securitizations ahead?
The Dominican Republic is considered to be a poor country that lacks a positive credit history. Standard & Poor's has a double-Bminus foreign currency rating on the Dominican Republic and Moody's has the sovereign rating at Ba2.'
"We actually upgraded them last year because of improving trends overall," said Richard Francis, a sovereign analyst at S&P. "They have had pretty high economic growth, they increased the VAT, which increased tax revenues and helped their fiscal balance, which is pretty good for Latin America."
The weaknesses, however, seem to lie in government management. Last year the government had local bonds that were in default, which were just under 2% of GDP. According to Francis, they were in default as a result of management issues as opposed to the country's inability to pay. The local bond default was cured last year, which played a major factor in S&P's ability to upgrade the country's sovereign rating.
Another weakness is that the Dominican Republic has relatively low international reserves, which constrains its liquidity. "They are trying to work on some of the government issues, especially with the management," Francis said. "One of the things that we are looking for, that we think is really important is that they pass the monetary and financial code, one of the key components of which is to give full independence to the Central Bank and allows them to divest themselves in some of the non-core activities that the Central Bank has - they have been involved in tourism operations and things that a normal Central Bank doesn't really get involved in."
The Dominican Republic has also been the fastest growing country in all of Latin America and the Caribbean, with a 6% growth rate for the first half of this year. According to Francis, the growth has been fueled by increased foreign direct investment; last year, much of the growth seemed to derive from an uptick in agriculture.
Other areas that have typically fueled growth for the Dominican Republic, including telecommunications and tourism, slowed in the fourth quarter, although Francis said it was more than made up for by growth in investment and more traditional sectors like agriculture. "Tourism slowed because of Sept. 11, as it did everywhere, and in the first half it was still down year-over-year, but it was steadily improving," Francis said. "One thing that the Dominican Republic has that a lot of the Caribbean doesn't have is that the tourism industry is very well diversified. A significant amount of the tourists come from Europe, [whereas] most of the tourists in the Caribbean are from the U.S."
Going forward, there seems to be potential for a well-developed securitization market, sources said. "It's a lowly rated credit and there is risk there, but there are also opportunities for securitization when it's rated so low," said another sovereign analyst. "And some of these Caribbean and Central American countries seem to be somewhat isolated from the current market turmoil because they don't have a great deal of market debt."