An announced merger between Brazilian banking behemoths Banco Itau Holding Financeiro and Unibanco-Uniao de Bancos Brasileiros has reverberated through Sao Paulo's financial sector, as the move would produce the country's largest bank.
As of September, the combined assets of the two giants totaled R$575 billion ($271 million), accounting for roughly 20% of the local banking system.
The merger's impact on securitization is not clear cut. On the cross-border front, it creates a potential giant of diversified payment rights, the collateralization of electronic wire transfers used as a funding tool by banks throughout emerging markets.
This, sources said, might lead to deals from the merged entity, Itau Unibanco Holding, that would be larger than what the market has seen from these banks as individual firms. The two have tended to issue transactions in the $100 million to $200 million range.
The effects have not been sorted out for outstanding DPR deals, as they hinge on the form that the merger will take.
Nonetheless, no one anticipates dramatic changes on the ratings front. This is due in large part to a combination of strong DPR flows and the fact that the banks' relevant ratings are either only a notch separate, as is the case between Fitch Ratings and Standard & Poor's, or on par, as with Moody's Investors Service.
There is no doubt that overcollateralization in the DPR deals originated by Itau and Unibanco will furnish an ample cushion. This is especially true of Itau, where the combination of rising wire traffic and scant issuance in recent years has elevated the debt service coverage ratio (DSCR) to stratospheric highs. S&P estimated that Itau's DPR program, which has roughly $788 million outstanding, exhibited a DSCR of 390x as of September.
Meanwhile, Unibanco's program, amounting to about $1.02 billion outstanding, had a DSCR of 58x as of September, a respectable figure if not as stunning as its peer's.
S&P rates Itau's DPR deals 'A' on a standalone basis, with one tranche rated 'AA' thanks to a wrap from Ambac. The agency rates Unibanco's program 'BBB+'.
S&P's ratings on DPR transactions are not merely a function of the flow coverage and strengths of the structure, they also reflect the underlying bank's rating. Since the originator still manages the flows, the agency factors the "survivability assessment" of the bank into its DPR rating as well. This is linked to the corporate ratings.
On the corporate side, S&P said the merger would not have an immediate impact on the ratings of Itau and Unibanco, which stand at 'BBB' and 'BBB-', respectively.
"We are currently analyzing the merger and will review ratings implications in light of the stronger competitive position of the combined entity, Unibanco's somewhat weaker credit profile than Itau's, third-quarter results, and the current challenging global financial environment," the agency said in a report.
This translates into no change for the DPR deals, at least for now," said Juan de Mollein, managing director at S&P. "If the ratings of the banks change, that could have an impact. We'll see how the merger is sorted out."
Meanwhile, Fitch placed Unibanco's long-term local currency issuer default rating of 'BBB' on positive watch, given that Itau's analogous rating is a notch higher. Apart from structural features and flow strength, the rating agency focuses on what it calls the "ongoing concern" of the originator, which is shaped by its global scale local currency rating.
This means that an upgrade in Unibanco's local currency rating to match Itau's could have a similar effect on the future flow rating of the former, although that is not automatic. Presently, Fitch rates Itau's and Unibanco's DPR programs 'A' and 'A-', respectively.
Following the merger announcement, Moody's, like S&P, affirmed the ratings of the banks, which, for the global local currency, are both at 'A1'. This is the same as the standalone DPR ratings. "According to our methodology, we can't go higher than that," said Maria Muller, senior vice president at Moody's.
Brazilian DPR programs have gone through the mergers of originators before. In 2002, Banco Itau merged with Banco BBA-Creditanstalt, and the latter became a seller in the former's DPR program. In a somewhat different approach, merged entities Banco Santander and Banco do Estado de Sao Paulo (Banespa) made their debut in DPRs in September 2004, each contributing its own flows. A deal from Banco Santander earlier this year was backed by combined flows.
In the domestic market, the Itau and Unibanco merger will have at most only a modest effect on ABS. As an arranger, Itau BBA has a number of deals under its belt, but Unibanco hasn't been a player, according to sources. As a result, there are no apparent redundancies on that front. Itau also has been quite active as a custodian of receivable investment funds (FIDCs), although the bank has been surpassed by Bradesco in that role, according to a Sao Paulo banker.
Unibanco didn't have a meaningful custodian business, according to sources. As with other top-tier banks, neither Itau nor Unibanco collateralized self-generated domestic assets, a field that has been the province of small and medium sized banks, as well as nonbank originators.
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