Things appear to be going sour for a Brazilian deal linked to disgraced dairy company Parmalat, despite a reiteration two weeks ago of its triple-A national-scale rating by Standard & Poor's. "There will probably be an early redemption" of the R$150 million (US$52 million) transaction, said a source close to the deal. Senior shares account for R$127.5 million of the volume.

With Itau BBA as lead bookrunner and Santander as co-lead, the deal is a receivables investment fund, a vehicle endemic to Brazil that combines features of a traditional SPV and a mutual fund. Motta, Ferndandes Rocha provided legal counsel.

At first the fund seemed well equipped to weather the Parmalat storm. When it closed Nov. 25, the media was already rumbling about opaque finances at the Italian company and a group of about nine Brazilian investors bought in anyway. They snapped up roughly half the deal at a respectable 170 basis points over the benchmark CDI. Itau's asset management arm took the rest, according to sources. Diminishing returns on more traditional investments had ratcheted up the appeal of receivables funds and the top-notch rating was the clincher. Investors were confident in the structure, backed by trade receivables from clients of two Brazilian Parmalat units.

But, eventually, they lost their nerve as accusations of fraud and diversion of funds struck a deafening crescendo. A meeting of fund shareholders timed for Jan. 6 will probably result in early redemption, the source said. The deal's beneficiaries - Parmalat Brasil and related unit Batavia - would no doubt be disappointed, but a premature death could ironically bolster faith in the budding sector of receivables funds. "It's going to prove that the instrument works even in a stressed scenario," a source said. Investors, he explained, should reap both their capital and targeted interest upon redemption.

Stomach cramps from the dairy sector did not prevent the Santander-Itau team from pressing ahead with another issuer. The first half of a fund for petrochemical potentate Braskem closed Dec. 15 at 113.5% of CDI. Volume reached R$100 million, with subordinated shares amounting to 15% of the total. Asset managers, pension funds, and banks bought into the deal, which has a tenor of three years. Itau, again, bought about half the deal, according to a source familiar with the deal. The bid-to-offer ratio for the other R$50 million hit 8x. Mattos Filho, Veiga Filho, Marrey Jr. & Quiroga provided legal counsel.

Moody's Investors Service has rated the senior shares of the fund Aaa.br.'. Among other features, the agency cited the strong eligibility requirements for receivables and the exceptional credit quality of the assets, with an average delinquency rate of 1.9% over a 60-day period.

While the Parmalat and Braskem funds resemble each other in structure, the issuers chose different options for pricing. Braskem went for a percentage of CDI, while Parmalat opted for a spread. "It depends on where you think rates are going," a source said. Investors, at least, are better protected with spread product.

Braskem is the leading petrochemical company in Latin America. It stands among the five largest industrial concerns in Brazil and its output accounts for 45% of the basic petrochemical and solvents produced in the country. Proceeds from the deal will go to retire a more heavily taxed SPV issued in 2000.

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