The Latin American storyline shifted last year as the gangrenous financial crisis spread from the countries where it sprang forth to the periphery. For the first half of the year, talk in the region was of resilience and differentiation from the credit-mad developed world. In the second half, and especially the last quarter, the rhetoric swirled around how far contamination will reach and which sectors are most vulnerable to a drop in asset quality.
As Fitch Ratings pointed out in its 2009 Review and Outlook for Latin America, the decoupling thesis is no longer compelling.
The region's inoculations - low indebtedness by U.S. and European standards and key governments making progress in fiscal discipline and cutting foreign currency debt, among other buffers - may not have saved it, but from a ratings standpoint, last year was far from disastrous. Within the sweep of securitizations it covers, Fitch affirmed 616 tranches, upgraded 47 and downgraded 61.
But the ratio of negative to positive should edge higher this year, the agency said. On the cross-border front, Fitch tallied $3 billion in issuance, a touch over the $2.8 billion tracked by ASR (see table). With spreads ballooning, monolines out of the equation and existing assets looking like a riskier proposition, deals backed by diversified payment rights had a chance to show their mettle. Aside from Peru's Banco Continental, none of the originators were first-timers, although on the arranger side there was an unprecedented strong showing from Japanese banks Sumitomo and Bank of Tokyo-Mitsubishi.
Naturally, in the harsh investment landscape, most arrangers had to scarf down their deals. There were exceptions, however, according to sources. Two notable ones were Banco Santander's deal in May and Banco de Credito del Peru's in June. Moody's Investors Service subsequently upgraded Santander's transaction.
The only monoline present last year was Assured Guaranty Corp., which wrapped the year's first ASR-tracked transaction, a $250 million, 6-year transaction from Banco do Brasil. But the year ended with the transaction at 'Aa2' from Moody's following a downgrade for the guarantor.
While the DPR programs in Latin America all enjoy generous debt service coverage - in same cases near 100x - transactions are likely to see their enhancement chipped away. For their ongoing health, DPR programs in Brazil depend on strong flows from commodity exports and foreign direct investment. Both segments took a hit last year and are expected to get pummeled some more in 2009.
On the domestic front, Mexico's image deteriorated from a paradise with enough room for platoons of i-bankers and the occasional foreign investor to yet another troubled front of the global debacle in RMBS. To be sure, delinquencies overall have yet to exceed Fitch's initial expectations, but projections point to further increases. The construction loan segment - which goes hand in hand with RMBS funding for many nonbank lenders known as Sofols - was hit harder. In one case, Metrofinanciera, there was an outright mishandling of deals by the servicer. Of the 23 tranches of structured finance transactions that Fitch downgraded in Mexico, 16 were related to construction loan ABS originated by Metro.
For this year, all the signs point to Mexican consumers having more difficulty in making loan payments in all asset classes. "Fitch is cautious about 2009's asset-performance expectation," the agency said.
In Latin America's other leading domestic ABS market, Brazil, the agency also sees greater stress on borrowers. For last year, Fitch tallied $5.3 billion in placements, well below the $8.6 billion estimated by local consultancy Uqbar. The discrepancy is unsurprising for Brazil, where issuance in the ABS market is notoriously difficult to follow. At any rate, Fitch said 90% of the volume took place in the first three quarters, an indication that a slowdown was underway.
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