Cowboys gone bad, dodgy ranch hands and stolen livestock branded with the insignia of sophisticated financial trusts: a corner of Colombia's securitization market is looking awfully like a Western. While the marriage of agribusiness and structured finance in that country has gone smoothly for other asset classes, recent drama surrounding a cattle-head backed program highlights the risks inherent in corralling footloose ranchers into a trust.

It all began a few months ago, when Cebar Ltda, acting essentially as servicer, noticed gaps in the securitized herds. "It was bad faith by a couple of cattle owners," said Patricia Gomez, an analyst at Fitch Ratings affiliate Duff & Phelps. Two originators were selling cattle owned by the trust and pocketing the proceeds.

Commodities & Banca de Inversion structured the program, while FiduColombia is trustee. Designated as the deal's "operator," Cebar is responsible for selecting the cattle and the farms, monitoring the fattening-up process, and selling the animals. In practice, some of the selling has bypassed Cebar and has been executed directly through the National Agriculture and Livestock Exchange. In all, 20 one-year issues have come off the program, with 15 to 21 cattle owners in each placement.

It is understood that the trustee has launched criminal proceeding against at least one of the offending originators, the only legal recourse it might have. Calls to FiduColombia were not returned as of press time.

The illicit sales weren't hard to detect, as the bovine assets carried the brand of their true owner. "They kept on finding the trust cows on other property," said Luis Fernando Guevara, analyst with BRC Investor Service, formerly BankWatch Ratings. Aside from these structural transgressions, some of the herds had been thinned out by poaching and, in one intriguing case, a thieving ranch-hand had duped the unsuspecting wife of a landowner, according to sources.

An insurance policy from Agricola de Seguros on the remaining issues does not cover losses from deliberate sales to buyers outside the structure, according to sources. Theft, however, is covered, as well as terrorism. Officials at Agricola could not be reached.

Under the structure, rights to a specified number of cattle and the corresponding land were transferred to financial trusts. The main enhancement was overcollateralization from excess cattle.

The implications of the cattle deal extend beyond Colombia and this asset class. Seller integrity - or out-and-out fraud - has widely become a concern in securitization, especially since last fall's monumental US$3 billion collapse of National Century Financial Enterprises, where the legitimacy and mere existence of receivables are still unanswered questions. Other instances of fraud include alleged double-selling of receivables (First National Bank of Keystone),

selling assets to subsidiaries, and other schemes that generally were used to make a deal look like

something it's not.

These all intended to keep the paper house standing for as long as possible. But what happens when a seller of a to-be-delivered receivables decides he no longer wants to participate in a deal? Or in the words of Duff & Phelp's Gomez: "How can you protect a deal from the originators themselves?"

Rating agencies take notice

Further damage to the Colombian cattle deal arose when some leading supermarkets that had signed on as buyers began to delay payment until up to 90 days of delivery, according to BRC's Guevara. Compressed margins in the sector have many supermarkets strapped for cash, and the program allows for little payment flexibility.

The drop in herd size cut down the overcollateralization, prodding risk-watchers into action. Duff & Phelps downgraded to a short-term DP3' from DP1-' the five remaining bonds issued off the program, totaling Ps27 billion (US$9.3 million). BRC took down the four last series two notches to BRC 3' from BRC 2+'. The fifth-to-last, Series 16, matured without incident in August. At both agencies, the paper has fallen two rungs and is now on the edge of local-scale investment grade.

The transaction has, for now, avoided junk status because the overcollateralization is still sizable, sources said. "The [cattle] losses have been eating that up, but it's still around 20% in the different deals," Gomez added. Initially, the figure was 33%. The last issue off the deal, Series 20, priced in February.

Intent on averting the problems of the downgraded paper, two different arrangers of future cattle bonds are looking to tweak the structure. At least one aims to contract an insurance policy that will cover acts of bad faith by the originators themselves. Extending the payment deadline for suppliers is also in the works. The maturity of future deals will probably extend beyond a year as well. Some originators felt rushed to fatten their cattle by the short terms of the current structure.

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