NEW YORK - At Moody's Investors Service Seventh Annual Latin American Securitization Briefing, a shared story emerged among participants. In a nutshell, it was that domestic markets are flexing their muscles, while their cross-border cousin is looking malnourished.
So far this year, the region has yielded $8.2 billion in issuance on both the cross-border and domestic fronts, according to data collected by Moody's. Domestic supply accounted for 89%, or $7.2 million, of the aggregate, a breakdown that was similar to the split at the same time last year, according to Maria Muller, senior vice president of structured finance at the agency.
Leeching the energy from the cross-border marketplace is the easy money flowing to Brazil's banks and exporters, traditionally the main suppliers of structured paper. While an old structured finance stalwart like Banco Itau will still place the occasional cross-border securitization (see story on page 21), foreign issuance in the structured realm remains few and far between. "A lot of the [Brazilian] banks have already called or refinanced - Unibanco, Itau, Bradesco," said Emil Arca, a partner at Dewey Ballantine. The idea, participants said, is that with commodity-driven capital flows still streaming into the country, Brazilian banks aren't looking to come back in serious numbers anytime soon.
On the domestic front, Brazil and Mexico were naturally garnering the most attention. This year, Brazil in particular appears unstoppable and the receivable investment fund (FIDC), a vehicle for securitizations, has, in only three years, become de rigueur for deals outside of real estate. Domestic securitization in Brazil year-to-date hit $3.6 billion, compared with $3.9 billion in all of 2005, according to Moody's data. Clearly, the direction of the market is up. "We believe volume this year [in Brazil] will be higher than last year," Muller said.
In Mexico, issuance also seems poised to overtake last year's volume, factoring out the gargantuan deals backed by IPAB loans issued in 2004 and 2005. Volume has reached $2.0 billion so far this year, within striking distance of the $2.2 billion closed in all of 2007. While ASR has reported significantly higher volumes - $2.8 million in the first half alone (ASR, 7/17/06) - the upward trend is not a matter of debate.
Issuance in Mexico hit a wall in July when leftist presidential candidate Andres Lopez Obrador challenged election results that delivered victory to his rival Felipe Calderon. In August, originators came back. Earlier this month, electoral officials validated the outcome, but Obrador is still making noise, saying he will form a parallel government, according to news reports. But there isn't much anxiety out there, as evidenced by issuance this month and a robust pipeline.
"Mexico today is in a very different place from where it's been in the past, in the sense that now you have a track record of disciplined fiscal management and [institutionalism] that you didn't see 10, 15 years ago," said Francisco Paez, associate director of Latin American Investments at Metlife Investments.
Indeed, Mexican issuers are certainly going ahead with plans. Case in point: Metrofinanciera, one of the nonbank housing finance companies known as Sofols, is readying a deal for 295 million UDIs ($100 million) that will be issued both domestically and abroad (ASR, 9/18/06).
While not as voluminous as most of the future flow transactions that Brazil used to churn out with some regularity, the transaction will at least give foreign investors something Latin American to nibble on. "Our main objective is to tap different markets at the same time," said Armando Guzman, general director of Metrofinanciera. "Strategically speaking we need to be sure we'll have an open window on the financial markets, regardless of whether it's local or cross-border," he added, pointing out that domestic liquidity has its limits.
Guzman said that Metro projected $400 million in RMBS and $250 million to $300 million in deals backed by construction bridge loans.
Another theme threading through the talks on Mexico was its growing appeal to global players, especially on the real estate side. RMBS volumes in the country have reached nearly $805.3 million so far this year from $461.9 million placed in all of 2005, according to Moody's data. Assets linked to residential real estate accounted for 45% of all the deals issued in the year-to-date.
Genworth Financial is among the fresher global faces in the Mexican crowd. Only last month, it became the first foreign mortgage insurance provider to enhance an RMBS in the country in the primary market. Now Genworth has moved further up the chain. Teaming up with Scotia Bank, the provider is offering mortgage insurance on new mortgages as part of a product that precludes the need for a downpayment, said Alejandro Rivero-Andreu, CEO of Genworth in Mexico. The company still doesn't have a license to operate in the country, and has had to receive special permission from the government to make domestic deals. "Over the next week, the rules for operating in Mexico [should] be published," Rivero-Andreu said. "Then we'll apply for a license. We expect to have it in the first part of next year."
The lure of co-financing
The evolution of Mexico's mortgage market has spurred participants to tinker with different RMBS structures and paths to origination growth, an area addressed at the Moody's conference. One area that has strong potential is the co-financing loan, a product that teams up a Sofol with Infonavit, a state agency that offers lower cost loans to lower-income borrowers.
"We are now going to a borrower that previously only tapped Infonavit," said Mark Zaltzman, deputy head of corporate finance at Su Casita, a Sofol. He added that currently almost a third of Su Casita's origination consists of co-financing loans. Metrofinanciera's Guzman said that his company has a similar proportion of co-financing loans. The advantages aren't only for Sofols either; if Infonavit were to co-finance more aggressively it could boost its origination by up to four times, Zaltzman added. In 2005, the average co-financing loan was 75% originated by a Sofol and 25%
by Infonavit.
One interesting challenge posed by these co-financing arrangements is that payments to Infonavit loans are automatically deducted from a borrower's paycheck while payments to Sofols aren't. In a co-financing loan "it's possible that the Infonavit loan is current while the Sofol [one] is delinquent," said Carlos Benavides, assistant vice president at Moody's. He added that the agency must also ensure that the Sofol has full foreclosure and transfer rights on its portion of the loan.
The obstacles, though, are hardly deal-breakers, and the product is projected to not only expand but to also feed into RMBS. "We expect to see more and more of these in securitizations," Benavides said.
Argentina still on growth streak
While lacking the irresistible combination of the size, steady growth and investor liquidity of a Mexico or a Brazil, other markets in Latin America drew commentary by participants as well. Argentina, which has made a remarkable recovery from its crisis that peaked more than three years ago, has yielded $1.6 billion in domestic securitizations so far this year, a sure sign the country will top 2005's full year figure of $1.8 billion. Consumer assets continue to dominate the market, accounting for 46% of all securitizations in the year-to-date, according to Moody's. The asset class isn't likely to be dethroned in the foreseeable future either, with growth riding on the local currency denomination of the assets, the established nature of the originators, and plentiful volumes, according to Federico Hermida, head of structured products at Deutsche Bank in Argentina.
On the other hand, mortgages, which have caused such as stir in Mexico, will remain an underwhelming asset class in Argentina. "Next year, we won't be seeing too much in mortgage-backed securities," Hermida added.
Across the Andes, Chile's RMBS still hasn't fully recovered from an explosion of prepayments that recently rattled the sector. A steady drop in interest rates, paired with vulnerable structures, ate into a number of deals. The problem was that too many deals relied on excess spread, and were undercollateralized, the type of structure that is shakiest in a prepayment barrage. While there has been issuance since the crisis topped out last year, it hasn't been as voluminous as in the past.
"I don't know that the major originators have an incentive to go into this market," said MetLife's Paez of Chile's MBS market.
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