While the subprime bullet has only nicked domestic issuance in Latin American structured finance, and there's plenty of liquidity among local investors to shrug off the crunch abroad, the cross-border front has been struggling to hop back on the rails.
Deals from Turkey, Russia and Kazakhstan-the slice of the world handled mostly out of London-halted in late summer, and they still haven't come back.
Mirroring other contaminated classes in Europe, spreads have gapped out between 100 basis points and 300 basis points over the past few months. For existing assets in the ex-Soviet Union, collateral is being warehoused, as originators balk at issuing public deals at these prices. But it's clear this can't go on indefinitely. Signs point to warehousing weariness.
"Right now few banks are putting together warehousing facilities because they don't have exit strategies," said one London-based banker. What arrangers had hoped would last only a couple of months spilled into the fourth quarter, and it must be getting harder for EM bankers to convince their credit committees to shoulder more EM debt on the balance sheet, especially if it's in the housing sector, he said.
There is a counterview. Some bankers say facilities are very much alive, and that, even if securitization doesn't sputter back to life early next year, term deals aren't the only exit strategy. Whole loan sales, for instance, might work.
Originators are looking askance at the brave new pricing world because, in part, they think they're being unfairly punished for a credit crisis that has nothing to do with their particular collateral.
The differences with U.S. subprime are inescapable. Borrowers in these EM portfolios tend to be affluent. The mortgage market and Russian consumers are generally underlevered, and Russians in general have seen their per capita income rise faster than the dizzying upward spiral of housing prices across the country over the past several years, according to a recent presentation by Fitch Ratings. "There's room for them to take on consumer debt," said an analyst. "The amount of equity on these deals is also much higher than in U.S. subprime."
All true, but there has been a repricing across markets. And even if investors become entirely convinced that Russian mortgages have not a whisker of subprime in them, they're still new and relatively untested. In a risk-adverse climate, that carries a fat cost.
The issuance pause in the public market has been even more abrupt in the future flow sector. DPR deals from leading Kazakh banks are looking tender, with the underlying local currency ratings tickling the sharp edge of high yield (see ASR 11/7/07).
Compare that to Brazil. Latin America's largest economy has witnessed R$9.13 billion ($5.3 billion) in issuance of shares of receivable investment funds (FIDCs) through Nov. 3, according to local consultancy Uqbar. In the first nine months of the year, placement was up 26% from last year. Activity slowed in the third quarter, but the consensus is that this had nothing to do with subprime. The main culprit was banks that had lost their taste for ABS funding after cashing in on IPO and M&A activity.
Then there's Mexico, where domestic issuance returned in earnest in October. Only in the past few weeks, prospectuses have been filed with Mexico's regulators for the state of Oaxaca, looking to collateralize car registration fees; mortgage player Hipotecaria Total, which might soon introduce Mexico to the Danish concept of securitizing a loan the moment it's originated.
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