Stagnant growth, pervasive unemployment and a maligned currency do not exactly make for a cheery holiday season in any country. But after years of grueling recession, Uruguay and Argentina have seen much worse, to say the least, and two deals that closed directly before Christmas hold the promise for some uplift in 2003.

In Uruguay's tiny capital market, Banco ACAC, part of the French banking group Credit Agricole, pulled together a novel deal designed to alleviate financing pressure on beleaguered milk producers. With local firm Ferrere Lamaison providing legal counsel, the transaction was sized at US$26 million, hefty by local standards. Drawn to an 11% yield, domestic pension funds and other local institutional investors bought in. The transaction closed Dec. 20.

Like in neighboring Argentina, structured deals are unlikely to attract foreign investors in the foreseeable future.

The securitization is basically a future flow deal involving a milk fund established by the government in early November, the FFAL. By law, milk distributors must deposit Ps0.84 (US$0.03) into the fund for every liter sold of liquid milk, which is a regulated market in Uruguay. The deal is a securitization of the FFAL flows and garnered a AA(uy)' national-scale rating from Fitch Ratings.

Some 60% of the transaction's proceeds is being used to pay down debt that producers owe the state-owned Banco Federal de Uruguay. They receive the remaining 40% to use at their own discretion. "They can finance improvements or use the money to get into another business," said a source close to the transaction. "A lot of these producers have been brought to their knees by the economic situation."

Milk production in Uruguay is broadly dispersed, whereas distribution is concentrated in a few firms. Conaprole controls roughly 70% of distribution. Parmalat comes in a distant second, with 15%.

The paper has a final maturity of 15 years, but should mature in 6.5 years if milk sales stay near historical volumes. Payments are monthly.

Uruguay lacks laws that specifically address securitizations. "There doesn't yet exist a true separation of assets," said a source. The milk deal is backed by the law that created the FFAL and that stipulated mandatory contributions to the fund.

Risk lies primarily in an unlikely scenario of collapsing milk consumption. Though the denomination is in dollars, further devaluation is seen as less of a risk for the deal, since the FFAL contributions are exchange-rate adjustable. A US$2 million reserve fund adds further support.

Meanwhile, across the vast estuary of the Rio de la Plata, a much larger market saw its second export-related deal of 2002. As part of an ambitious program to kickstart the export economy, state-owned bank Banco de Inversion y Comercio Exterior (BICE) issued US$25.6 million in 18-month certificates on December 23.

The yield for the US$20.5 senior piece came at 6.5%, inside the 7% garnered by the senior tranche of a similar US$8.8 million deal from HSBC Argentina priced on Nov. 27 (see ASR 12/09, p.18). The tighter rate appears to underscore a growing appetite for paper among investment-hungry Argentine pension funds.

Standard & Poor's rated the senior tranche of the BICE transaction ra.A+' on the national scale. A junior piece worth US$5.1 notched ra.BBB-' on the national scale.

Marval, O'Farell, & Mairal was legal advisor on the deal, which is effectively a CLO. The loans backing the paper are going to be extended through eight to 10 private banks, which are subject to the lending criteria of the trust. HSBC is trustee and is expected to be one the funneling banks as well.

The creditors will be small exporting firms from all the main sectors, with loans ranging from US$300,000 to US$3 million. About 130 firms are expected to participate, selling everything from grains to minerals to oil and gas. "There was a huge diversification with this deal," said Juan Pablo de Mollein, associate director of structured finance at S&P.

Payments will be made in dollars or in pesos at the prevailing exchange rate.

BICE aims to issue more export deals in 2003. De Mollein expects one or two more transactions this year.

Buenos Aires' sluggish market will grind even slower ahead of presidential elections scheduled for April. But thanks largely to cash-hungry exporters eager to capitalize on a cheap currency, a few deals are expected to squeeze through before then.

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