LONDON - Panelists at Standard & Poor's Latin American and Emerging Markets Forum in here last week identified the key events that have affected the structured finance markets in Latin America and other emerging markets over the past 12 to 18 months. Major points of discussion included the global slowdown in economic activity, the events of Sept. 11, and the financial crises in Argentina and Turkey.

The global economic slowdown has contributed to lower commodity prices, which have negatively affected the performance of some commodity export deals. The downturn in prices has contributed to issuer balance-sheet problems, but generally the overcollateralization levels on these transactions tend to be high, providing a good buffer to absorb the downturn.

Of greater impact has been the direct link between transaction performance and the corporate credit quality of the issuer. This link remains central to future-flow transaction ratings, and has greatly contributed to the downgrade of structured finance deals. So far, the oil export deals - such as PEMEX Master Trust (which has maintained its single-A rating) and Argentina-based YPF - have been the performance exceptions. YPF's SEN I matured in May 2002, and SEN II and III are due to mature in October 2002.

"The price of oil held up," explained Kevin Kime, a panelist at the Forum. "In Argentina, those deals were exempt from repatriation controls. In Turkey, the DPR cash flows held up better; however, it was not just the export receivables that held up well, but also the worker remittances. The debt that [S&P] has rated from larger institutions [in Turkey] may have benefited from a flight-to-quality that would have bolstered their cash flows."

But in a report released last week, S&P said that the success of Argentine future-flow structures should not be based on the performance of the YPF transactions. The report cautioned that the legal structures of these deals have not yet been fully tested to determine how well they will withstand direct sovereign interference risk.

According to S&P, the Argentine government could reverse the exemptions for long-term, cross-border future-flow deals, which would require all export proceeds to be immediately repatriated. However, S&P adds that exemptions from such risk will be likely be tested, and the agency believes that the sovereign would be reluctant to apply foreign exchange controls to interfere with these transactions.

Transactions that suffered as a result of lowered commodity prices are Grupo Mexico senior export notes master trust (primarily impacted by lower metals prices and the weaker balance sheet of the issuer) and Trikem Export master trust.

Financial crisis

"In Turkey, the financial crisis was centered in the banking system, but bank future flows - both credit card vouchers and diversified payment rights transactions - have performed well," said Kime. "In the Argentine pesification, devaluation and severe macro [economic] stress have caused widespread defaults. The key issue has been the vulnerability of the transactions governed by Argentine law. Future flow assets have been the exception."

According to S&P, while credit card merchant voucher future-flow deals in Latin America remained largely unaffected, Turkish deals did experience a significant drop in collections in the fall of 2001. The deals impacted by the drop in travel included the Akbank and Garanti Bank transactions. "These deals are directly related to the Tourism industry in Turkey, but lately they have seen a bit of recovery and the flows have been more robust," said Kime.

Going forward, S&P expects to see increasing involvement of foreign banks in Turkey, which will bring renewed activity in the country - there is potential for a deal to be completed by this year. "If progress continues," said Kime, "the market will rebound in 2003."

Also expect to see activity from Egypt, which is slated to issue its first cross-border credit card merchant voucher future flow this year. South Africa will continue to look at future flows; however, said Kime, the Reserve Bank has expressed reservation regarding the cost-competitiveness, and it's likely that more growth will be experienced in the mortgage market as a result.

He added that Russia continues to generate a fair amount of interest, but the legal system there still needs development. "It's difficult, but not impossible," he said. "Future flows are more viable; but over the long term, Russia holds a lot of promise."

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