The dramatic reversal of fortune for commodity exporters, induced by a plunge in prices and the global liquidity crunch, has altered the terms of financing for a sector that benefited handsomely from the market trends of the last several years.
The question is whether they've altered enough to revive the export-backed deals that were a viable funding option before easy money and sky-high prices made them obsolete. While in the near term such a change seems unlikely, the conditions next year will arguably be more auspicious for this sector of ABS than they have been since 2004.
"We've been talking to a lot of investors about what they'd like to see when the markets come back," said Reggie de Villiers, head of Latin American securitization at Merrill Lynch. "One thing we've heard is secured export notes."
But even if investors would be ready to buy these bonds once the capital markets get back on track, buy-siders won't necessarily see eye to eye with originators on pricing. What's important to keep in mind is that, overall, exporters that once issued these transactions are in an entirely different place than they were in 2003 - 2004, the last period in which they issued these transactions in appreciable volumes. This holds especially true for Brazilian corporates.
"One major difference is that most of the companies in the export sector are much better capitalized, and they have stronger balance sheets," said Reginaldo Takara, senior director at Standard & Poor's. "They're entering this situation with a lot of cash reserves."
There were a handful of Brazilian corporates among the companies that placed export notes before sky-high prices and easy money made it uneconomical. Among them were oil giant Petroleo Brasileiro (Petrobras); wood pulp producer Aracruz; iron ore company Vale, formerly known as CVRD; and steelmakers Gerdau and Companhia Siderurgica Nacional.
Other exporters outside of Brazil that tapped this market between 2002 and 2004 included Argentine oil giant YPF and Egyptian General Petroleum.
A few exporters contacted for this article didn't return a request for comment, with the exception of Vale. In an e-mail message, a PR official at the iron ore producer said it "does not have any intention to raise money in the capital markets in the near future."
"The company has successfully issued shares this year and raised $15 billion," she added. "Therefore, Vale is now in a very comfortable position in the market."
In broad strokes, this holds true for its peers as well. Even with a number of global banks having shut down their trade credit lines to leading Brazilian exporters, balance sheets have remained robust. So far, Aracruz is the only Brazilian exporter and former ABS issuer mauled by the financial crisis. Along with a few peers, it was on the wrong side of currency derivative trades, which have led to losses estimated at $2.1 billion as the real has plummeted against the dollar. Banks are currently in the process of restructuring debts stemming from the derivative contracts.
But when times were good, Aracruz actually pre-paid its two export-backed deals: a $175 million eight-year issued in 2004 and a $400 million eight-year issued in 2003.
Even for those companies like Vale that have more resilient balance sheets, a prolonged slump in commodity prices could generate financing needs, and the banks and unsecured investors that were once unfailingly generous may not be willing to pony up as before, sources said. This could provide a good selling point for secured transactions.
Some sources were quick to point out, however, that a major ratings catalyst for the issuance of these transactions no longer exists. To achieve investment-grade ratings on a bond and pierce the sovereign ceiling at the different agencies, the most popular option available to exporters in Brazil a few years ago was to back the paper with export receivables.
This collateral was not only integral to the business lines of the companies, it was also generated abroad and naturally hedged against dollar volatility.
"When they issued those deals, it was the best way that they could get foreign currency investment-grade ratings," said Victoria Moreno, vice president at Moody's Investors Service.
At Moody's, the country ceiling rating for Brazil is currently 'Baa3'. In 2003 and through most of 2004, it was 'B2', five notches below investment grade. It reached 'B1' in September 2004. Fitch Ratings had the country's foreign currency rating at 'B' in 2003, bumping it up to 'BB-' in September 2004. At S&P, Brazil's foreign currency rating was 'B+' in 2003 and 'BB-' at the end of 2004.
Back then, achieving investment grade was a way for these exporters to tap a certain class of investor.
"It was the case of good companies in a bad ZIP code," said Greg Kabance, managing director at Fitch. Now, not only is Brazil investment grade at all three agencies, but the exporters themselves are higher rated.
But some sources said that while it was a primary motive in the past, piercing the sovereign isn't the sine qua non for future flow issuance. "Now, future flows would be for investors looking for additional security," Kabance added.
With a sovereign constraint to investment grade no longer the issue, exporters would use the collateral simply as a way to achieve a cheaper cost of funding, and not necessarily to attract investors primarily concerned with the investment-grade dividing line.
While exporters such as Aracruz either paid down programs or let them mature, others, including Petrobras, CSN, Petroleos Mexicanos (Pemex) and Vale, still have outstanding programs. Sources have said that in some cases originators kept these programs alive even though unsecured funding during the last few years was cheap enough at times to economically justify retiring outstanding export-backed deals.
The recent violent swings in commodity prices mean that the approach to these programs might have to change. "You're going to base your assumptions on prices that would be a lot more conservative than what they would have been a year and a half ago," said one market source. On the other hand, commodity prices were nowhere near the levels of the last few years when issuance was active in the 2003 - 2004 period.
Structural simplicity in the export-backed programs is also key to their revival, sources said. "If they do come back, I wouldn't expect many new features," said Juan de Mollein, managing director at S&P. "The simpler the better. And, in fact, many of the programs were created in that fashion."
As future flow transactions are linked to the risk of the originator in a fairly straightforward way, sources have said that these deals could benefit from the recent aversion to more complicated structures.
The market looks different nowadays not only through the lens of originators, investors and the pricing environment. The arrangers that made their names in this sector years ago may not be the same ones that would be involved in future transactions, either because personnel changes or management decisions have downgraded the role of EM in their business strategies, or because new entrants will price them out.
One source noted that Japanese banks such as Bank of Tokyo-Mitsubishi and Sumitomo Mitsui Banking Corp. could replicate their recent forays into diversified payment rights, an area of future flows that had seen fairly public activity through the second quarter of this year.
Of course, these "what if?" scenarios still hinge on some kind of return of market activity. For now, any question of whether export-backed deals are headed for a comeback can all too easily be overwhelmed by the inescapable fact that most kinds of deals have zero traction in the current market environment.
"There's still no clear process for price discovery," said one London-based banker who is active in future flows.
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