Diversified payments rights have grown into a pillar of emerging market structured issuance over the last decade. DPR deals have totaled over $16.8 billion in issuance so far, with originators from Turkey and Brazil combined capturing 90% of the marketplace, according to a Standard & Poor's study penned by Directors Gary Kochubka and Diane Audino. The Turkey-Brazil duopoly is likely to keep its lead for a number of reasons, but former Soviet nations are expected to chip away at its pre-eminence. "The direction is east," said James Patti, a partner at Mayer, Brown, Rowe and Maw. "Russia and Kazakhstan are the next two and then we'll see about the Far East."
Puffed up with potential, countries like India, the Philippines and Indonesia haven't produced a single DPR transaction for one reason or another. And they will likely remain outside the orbit of the industry for the medium term, according to DPR veterans who have reconnoitered in these countries and come back unenthused.
DPR transactions enable banks, primarily in non-investment grade countries, to harness, for their own funding, the torrents of cash flowing through them for export payments, ex-patriot workers sending remittances home, foreign direct investments and other global transactions.
Mexico pioneered the sector in 1995, when Banamex issued a $206 million transaction backed by MoneyGrams via Merrill Lynch. The Turks quickly caught on and now the EU hopeful accounts for over $10.4 billion of issuance, with nearly $3.7 billion gushing forth in the first three quarters of this year. A leading catalyst for the recent eruption was an S&P upgrade of the major Turkish banks, which enabled structures to achieve investment grade. This, in turn, flung the most severe constraints off monoline insurers and opened the door to their feeding frenzy. In the last month, no less than five monoline insurers have debuted in the public primary market for Turkish DPR deals. How long this infatuation will last and whether other developments will dampen growth are the questions that presently loom over the sector.
"Depending on the pace of issuance next year, some borrowers will start to approach limits in their DPR programs in the second half of 2006," said Noel Edison, managing director of the asset securitization group at Standard Chartered. "But we'll continue seeing issuance." With surety appetite a main feature in the equation, the next phase, he added, will be when unwrapped deals genuinely price, without the benefit of a secondary wrap, through wrapped ones. With a handful of insurers debuting in the Turkish primary market only in the last couple of weeks, that event is not expected to be around the corner.
But other factors are in play as well. Some EM aficionados see an echo of Mexico in recent M&A activity in Turkey. Citigroup's purchase of Banamex and BBVA's of Bancomer have been blamed for hobbling DPR-backed issuance from two Mexican banks that, at one time, held the most promise. GE Capital Corp. recently announced the purchase of 25% of Turkiye Garanti Bankasi, a major DPR issuer, and acquisitions might not be over. The minority stakeholder is reportedly already funding the Turkish bank.
In addition, the recent launch of talks for Turkey's accession into the European Union could spur Western European banks' interest in lending to their Turkish brethren, as long the inevitable speed bumps facing the process don't turn out too jarring. As it is, the bank market is providing competitively priced one to two-year syndicated loans to many of the mid- and top-tier Turkish banks, according to one banker. Still, with average lives now exceeding five years for both uninsured and insured DPR deals "future flow securitization will continue to be an important source of longer term funding," said Alex von Sponeck, head of Merrill Lynch's emerging market debt capital markets group in London.
Finally, the arid local market for corporate paper could eventually turn into a watering hole for issuers closer to home, sources said. The Turkish government has traditionally crowded out local issuers with its bulky placements in Turkish lira, but its increasing access to foreign markets and the growth of an offshore Turkish lira bond market is lessening its dependence on domestic investors. This might generate small pools of liquidity that Turkish DPR issuers could sop up; but at least in the medium term, no one believes they will be much more than that.
No question of potential in Russia and Kazakhstan
In the former USSR, the pool of DPRs is mouth-wateringly huge, thanks largely to massive energy exports, according to sources. Kazakhstan's Halyk Bank issued a $100 million transaction via WestLB in September 2003 and Kazkommertsbank is rumored to have mandated JPMorgan Securities and WestLB for a deal. More could come, but DPR bankers face plenty of competition, according to sources. The Kazakhstani banks have already penetrated the unsecured market and they have easy access to funding from foreign banks keen to get in on the stellar growth in this energy-exporting country, sources said. The consensus appears to be that even if Kazakhstani banks use securitization more frequently they will treat it as merely another option in a menu of funding options.
Russia, which has yet to yield a DPR transaction, offers a stable of good candidates, according to sources. There is a group of four top-tier institutions and another handful just below them that could tap their DPRs, according to one source. But not all deals are straightforward. "For the public banks you have certain negative pledge issues, and tax issues surrounding the sale of DPRs by public banks" said Merrill's von Sponeck.
Bankers that tackle the Russian market must also deal with the enforceability of legal opinions regarding true sale. Even with its pledge structure, last year's $1.25 billion transaction from Gazprom that opened up Russia to future flows was still entwined in a reinforcing web of seven jurisdictions. A follow-up credit card deal for Rosbank featured a similar pledge arrangement.
Still, Russian banks are already gearing up to tap their DPRs. Vneshtorgbank has reportedly mandated a deal to Dresdner Kleinwort Wasserstein and Deutsche Bank Securities, while Alfabank has awarded one to DrKW and Merrill.
In Eastern Europe, the pool of candidates is limited. "The banks already benefit from cheap deposit funding, so they haven't gone the securitization route," one source said.
What's wrong with Asia?
When it comes to raw potential in DPRs, bankers point to Asia. In worker remittances alone, the figures are tantalizing. A recent paper co-authored by Suhas Kekar of the Royal Bank of Scotland and Dilip Ratha of the World Bank estimated that India received $20 billion of remittances in 2004, the Philippines took in $8.1 billion, and Pakistan, $4.1 billion.
A good deal of effort has centered on the Philippines because of a mix of the banking industry there and the country's credit rating. "There's probably four or five potential candidates there and the discussion as to whether they might do DPRs has been going since the asset class started in the late 90s," said Gregory Kabance, director of Latin American structured ratings at Fitch Ratings. One monoline insurer source said that the Filipino Central Bank hasn't "embraced the technology." Another source put it less diplomatically: "In the Philippines has been that the government has been attempting to assert ownership over the flows," he said. "This has been an issue for some time."
Yet another reason for the Philippines' non-existence in the DPR market is that the local banks haven't had a compelling incentive to seek out alternative funding when their Japanese counterparts are happy to lend to them at cheap rates, according to one source.
In the case of India, Mayer Brown's Patti said that a desire to diversify away from domestic capital markets, an expanding gap between yields on straight- and structured debt, or a coupling of rising interest rates and evaporating global liquidity could persuade banks in this split-rated country to securitize their flows.
Finally, Indonesia appears to have a different problem. While the recent energy-backed future flow transaction from PT Bumi Resources revived interest in DPR deals from that country, the low creditworthiness of the main candidates has kept back the asset class.
Latin America: tried and true
While DPR flows from Latin America may wax and wane in response to market conditions, Brazil and Central America will remain players, sources said. According to S&P, Brazilian banks have issued $4.5 billion, while $875 million combined has come from El Salvador and Guatemala. The Brazilian banks that have used DPRs have treated the funding alternative as just one arrow in a bulky quiver. Market conditions determine if they will go structured or unsecured or tap other funding sources. Right now, however, Brazilian banks are flush with cash and until rates creep higher, they are unlikely to come with much DPR product, sources said. In a sign of the times, Brazil's Unibanco recently closed a $200 million DPR-backed funding facility for future funding, according to a source.
With workers remittances equaling a disproportionately large share of GDP, Central American banks are poised to remain active DPR issuers, though their small size translates into small deals. According to Fitch's Kabance, about $2.6 billion in remittances streamed into El Salvador last year, about 16% of GDP. In Honduras, the figure is 15%. The Central American banks have also been modernizing their remittance business to capture more and more flows of this booming business. "We've seen a shift in the Salvadoran banks," Kabance said. "Since [Banco] Cuscatlan did a transaction in 1997, the volume of paper remittances dropped by 20% to 30% and now it's almost all electronic." And while foreign banks might want to take a greater piece of the remittances flowing out of the U.S., they are unlikely to bother with facing down the Central Americans on their own turf, sources said.
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