Upcoming presidential elections and sovereign uncertainties clouding Brazil are doing very little to hinder the country's structured finance arena. In fact, much to the surprise of many market participants, deals are quickly lining up and begging to close before elections in October.
Over the past year, market sources have told ASR that Brazil's market would hit a lull prior to the presidential elections, as many issuers would tend to wait for more sovereign and economic certainty. Furthermore, in light of the elections, earlier this month, Standard & Poor's lowered Brazil's foreign and local currency ratings to single-B plus and double-B, respectively, and maintained a negative outlook. Following the sovereign downgrade, S&P also lowered its ratings on various structured finance transactions and financial institutions. The rating agency said the sovereign downgrade reflects rising public debt, which further reduces the country's fiscal flexibility. Additionally, S&P said tighter fiscal management will be necessary to maintain the current levels of debt to GDP, given the worsening domestic debt profile and heightened market concerns over political uncertainties.
A report issued by S&P last week said Brazil's securitization market is on hold for the second half of 2002 as a result of the economic and political factors currently affecting the country. The report also noted that the country's structured finance market would pick up early next year. "The market should begin witnessing an increase in issuance activity in early 2003 when this climate of uncertainty is expected to soften," said Juan Pablo de Mollein, an associate director at S&P, in the report last week.
However, despite the downgrades and the looming uncertainties, it seems as though the market has already begun to gain momentum. "Even after this report was issued, [we have received] more proposals for this year, although it's not quite certain how many of these issues will come to market in the second half," said one analyst at S&P.
According to sources, most of the proposed transactions are the increasingly popular financial future flows, mixed in with a few corporate deals. Additionally, one market analyst noted that the majority of the new proposals have emerged from an array of market rookies.
All of the proposed financial future flows are said to be cross border transactions. "Everybody is talking about the elections, they all want to go to market before the elections, whether or not that is feasible I don't know," said one market analyst. Given that many of the proposals are newcomers to the market, the learning curve will possibly hinder some of these deals from reaching the market before the elections. "They want the deals done by September and I am really confused by this because it has always been in my mind that you don't go to market with uncertainty because you will pay a price for it."
So why are these new deals rushing to market? It seems that despite the downgrades and the uncertain political regime, the Brazilian market is relatively ripe. "I think that it's simply a case of the market being open for structured deals and you take advantage of an open market - especially in difficult market conditions," said one banker. "And then you also have the added aspect of extremely low interest rates. The five year is right now at 345 and it touched 334 yesterday - that's off of 100 basis points in the last six or eight weeks."
When markets hit tougher times, structured deals tend to gain popularity as deals with underlying collateral, and deals with security, become more appealing to investors. "[Financial future flows] are, generally speaking, designed to mitigate the sovereign risk and investors will still buy them and monolines will still wrap them," said the banker. Although, one monoline source told ASR that while the proposed deals involve first-rate issuers and are highly structured, quality is not the problem, capacity, however, is a problem. "I think that [all of] the monolines are close to capacity, - but they are not out of capacity," the banker said.
In addition to the slew of new proposals, a few repeat issuers have also been in the market lately. Banco do Brasil completed a second tranche of its MT100, Banco Itau also completed a second tranche off of its MT100; and Petrobras is currently in the market with a second tranche off of its export deal.