The persistence of risk aversion is heightening the focus of cross-border emerging market players on financial future flows.
In both EEMEA and Latin America, bankers are out pitching old-time originators, along with new entrants - a decision on a diversified payment right (DPR) deal is expected soon from the Bank of Azerbaijan (ASR,8/8/08), and Peruvian banks are keen too (ASR, 7/20/08).
But no matter how well this sector has historically performed - recent reports by Fitch Ratings and Standard & Poor's recount its strengths in the teeth of hostile conditions - there still have to be willing market investors for a resumption of the brisk activity the asset class generated from Brazil in 2003 and from Turkey in 2006, when monoline insurers stampeded in.
But institutional investors, even the triple-B buyers in the U.S. that have a long-established familiarity with the asset class, might not be the only answer.
Turkey's Akbank showed that two weeks ago when it closed a $393.3 million transaction backed by DPRs, selling the whole thing to a multilateral, the European Investment Bank (EIB) (ASR, 8/11/08). Unless market conditions see a miraculous turnaround in the next few months, expect multinationals to support more financial future flow deals from the EEMEA region.
Another option that could see a bit of a renaissance is the loan-note route. Before the monoline insurers arrived in EEMEA, a number of financial future flow transactions from Turkey and Kazakhstan were done as loan notes, primarily a province of WestLB. A few players said they might be attractive again.
"The market might be driving toward a simple loan placement," one source said. The mark-to-market pain recently suffered by bonds is a good motivator.
At any rate, expectations are strong that there will be more activity this year.
As the rating agencies periodically remind us, this asset class is as tough as nails.
The default rate for future flow deals - including those backed by export receivables - is a negligible 0.6%, while the average rating falls within the "BBB" category, as assessed by Fitch. The rating agency pointed out in its recent report that the current liquidity environment for cross-border deals from emerging market issuers looks much like it did in 2002, following Argentina's epic default.
"The survival of future flow structured transactions during stressful periods in Argentina and other emerging markets underscores Fitch's belief that these securitizations protect investors' interests by mitigating sovereign risks more completely than any other type of structure," Fitch said.
S&P was likewise laudatory in a recent report, saying that in the financial future flows segment - which covers not only DPRs but also credit card merchant voucher deals - overcollateralization is high enough to withstand at least a 50% drop in future payment flows at the current rating levels.
But nothing's invincible, and the agency added that worsening economic conditions can chip away at the deals. For instance, harder times for nationals abroad - such as immigrants living in countries like the U.S. and Spain, where job opportunities have dwindled - would tend to eat into remittances sent home and consequently shave down DPR flows.
Political issues can't be ignored either, even though these deals have shown that they can weather catastrophes like government defaults and even a coup d'etat (a Pakistani deal survived one of those).
But war? It'll be interesting to see what happens to the Bank of Azerbaijan deal. Georgia, after all, is right next door.
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