Latin American ABS and MBS held on last year thanks to domestic markets. As cross-border demand receded further, local investors remained a major force.
This, in part, explains why activity from the region fared so much better than the emerging markets on the periphery of Europe. Where the cross-border buy side was either in retreat or too demanding and domestic markets were undeveloped - e.g. Turkey and the CIS - activity crumbled.
This is not to say that LatAm issuance had much to cheer about. By most measures, issuance shrunk. In some corners, such as RMBS and construction loan ABS in Mexico, the crisis fallout was flat-out devastating and unlikely to recover this year.
Moody's Investors Service estimated structured finance issuance last year in LatAm of $13.5 billion, with cross-border activity just shy of 4% of the total. The aggregate figure was 31% off from the agency's 2008 figure. While the other agencies will come out with different numbers - Standard & Poor's preliminary figure is much higher than its peer's at more than $19 billion, perhaps due to inclusion of private deals - the final consensus will be that activity went south, especially on the cross-border side.
This year there is more optimism, as credit markets have come unstuck, a return to growth has generated financing needs and new opportunities have cropped up in Brazil and Mexico.
Infrastructure is one area where the mood is brightening, with potential looming even on the anemic cross-border side.
"In infrastructure I think we could see quite a bit of activity, and it could take different forms," said Reggie de Villiers, head of Latin America structured finance at Bank of America Merrill Lynch. "It could be similar structures to what we saw in the CRPAOs, which, from a capital market perspective, are attractive."
CRPAOs is the shorthand in Spanish for payment certificates issued by the Peruvian government. Deals backed by CRPAOs receive flows that the government has agreed to pay a given concessionaire for a completed infrastructure project. BofA Merrill Lynch as well as Deutsche Bank and BNP Paribas have led CRPAO deals in the past.
The approach to this segment, at BofA Merrill Lynch at least, is likely to move beyond strict ABS. The projects can be at different stages of development as well. "We're looking at roads or projects that are a combination Brownfield and Greenfield, where you might have existing cash flow or history that's being used to finance either a new segment or an expansion," de Villiers said. His team is now taking this approach with a toll road transaction in an emerging market.
Deals in the infrastructure segment may very well turn out cross-border, especially given the tremendous needs of some players.
But overall it is the domestic markets that will remain the collective locomotive in Latin America. Brazil and Mexico, and to a lesser degree Argentina, will remain the main focus of structured finance players in the region.
Brazil: From Good to Better
The old joke about Brazil being the perennial country of the future has lost resonance in the past several years. Mirroring other areas of the economy, the securitization market averted the destabilizing crises suffered by other economies. Asset performance was also generally healthy.
According to Moody's, issuance last year totaled R$9.4 billion ($5.0 billion), a 16% drop from 2008. The arrival of a CDO certainly caught the market's attention (see ASR January 2010), as did the first auto dealer-plan deal by GMAC. On the other hand, the once-busy sector of deals backed by payroll-deductible loans ground to a halt.
For this year, there is a good deal of confidence that the volume and number of deals will pick up. The economy is expected to grow nearly 6% in 2010, and the financing needs of players both big and medium-sized are likely to propel many into receivable investment funds (FIDCs), the vehicle of choice in the domestic market thanks in part to a tax advantage.
In an interview with ASR, Almir Barbassa, the CFO of Brazil's Petrobras, indicated that the oil giant will stay active in the domestic market's securitization sector (see p. 33), and there is talk that the energy sector in the country may yet produce cross-border activity as well. "Everything energy-related in Brazil will see activity," said a player in the cross-border space.
A few market participants said that, apart from the return of payroll-deductible loans, the market will see more of what's been active lately but in the form of more substantial volumes, both on the individual level and in programs.
"We're working on more CDOs and auto loans, but we're talking about a different scale," said Juan de Mollein, head of the Latin American structured finance group at S&P, adding that in the latter class European issuers might make their debut.
Past-due delinquencies of 90+ days in auto loans peaked at 5.4% in June 2009. By October they were at 4.7%, and Moody's said this diminishing trend should hold as economic growth ramps up and the employment picture looks good.
"We expect the larger, more established originators of auto loans to do securitizations," said Greg Kabance, managing director of Latin American structured finance at Fitch Ratings. "There were record production levels in 2008-2009." Local auto manufacturing went into overdrive when the government gave auto sales an exemption from the IPI, or Tax on Industrialized Products, in December 2008. This naturally bumped up the growth in auto loan origination as well. The outstanding balance of auto loans in Brazil, including amortizations, grew nearly 14% in 2009 to R$93.9 billion. "What happened is that the financing arms of the manufacturers are now bloated with loans," Kabance added. Banks have been lending briskly as well.
In the real estate space - where the "country of the future" joke has cut deepest in recent history - there could be new developments around the corner, although some players are still loath to hold their breath.
"RMBS won't be from banks but rather mortgage originators or construction companies, and we've also seen interest from the multilaterals," said de Mollein. Deals so far have been small and "opportunistic," he added. "Now we're seeing real interest from companies that have a different scale." The fact that development bank Banco Nacional de Desenvolvimento Economico e Social (BNDES) has thrown its considerable weight behind the sector by providing support to several companies is a positive sign for the future development of the industry. In addition, state-owned Caixa Economica Federal, always considered a prime candidate for RMBS, cranked out $22.9 billion in loans from January through November of last year, a 93% leap from the previous year, according to BofA Merrill Lynch research. De Mollein sees Caixa and BNDES as potential buyers of RMBS as well.
The perennial obstacle for attracting Brazilian banks into RMBS is the rule that at least 65% of their assets must be allocated to real estate-related investments.
One way around this could be covered bonds, said Fitch Director Bernardo Costa. "There is some expectation in the market that covered bonds might be useful to fund mortgage portfolios," Costa said. "Covered bonds would allow them to keep the assets, and therefore fulfill the regulatory requirements." While all of this is still very much open to discussion, banks seem open to the idea.
While much of this activity will be domestic, it does not preclude the involvement of foreign investors. Private equity players are already sniffing around, with Chicago-based Equity International recently snapping up an 8.5% share in Brazilian Finance & Real Estate (BFRE), with an option to purchase an additional 12.2% in the company.
The cross-border buyers of LatAm ABS and RMBS might also be willing to go to the product instead of having the product come to them. "There's a lot of international interest in Brazil," said one New York-based structured finance banker, adding that investors here continue to query about transactions denominated in local currency.
Mexico: Leaving '09 Behind
Mexico paints a more nuanced picture for 2010. The days when RMBS and construction loan ABS drew global players like bees to honey are over, and there is scarce hope that nonbank originators known as Sofoles will return with issuance this year. Performance in RMBS deals deteriorated on the back of a host of problems, ranging from higher unemployment to looser underwriting standards. In addition, there were the lingering reputational issues stemming from the collapse of Metrofinanciera's bridge loan ABS, a result of gross mismanagement.
The story was different with government-owned Infonavit and Fovissste, which kept RMBS alive in the domestic market during 2009 by issuing Ps23.8 billion ($1.8 billion) in deals, according to Moody's. By the agency's calculations, the two originators accounted for 65% of all securitizations in Mexico. Not exactly a strong sign of a market diversifying away from real estate-related deals.
To a certain degree, this year looks to be more of the same. "We expect Infonavit and Fovissste to be the leaders on issuance, but it will still be very challenging for the Sofoles or other issuers to get back in the market," de Villiers said.
Still, the 35% of the market last year, consisting largely of trade receivables, consumer loans and auto loans, looks set to grow. And states and municipalities might also make a bigger impact in the market.
With a notable Ps2.2 billion issuance from two units of cement maker CEMEX last year, the trade receivables arena became an attractive alternative for companies with a strong name but recently deteriorated credit strength. "Some big serious companies are looking at this," said Kabance. "These are high-quality names that wouldn't actually have to do this in ordinary times." In addition to CEMEX, he pointed to Holcim Apasco's Ps950 million trade receivables deal issued in December. Companies one tier down from the likes of Apasco and CEMEX might get into the act as well, he added.
The sub-sovereign sector is also fueling talk. The political cycle is likely to boost investment in infrastructure by states and municipalities, which will need funding for those outlays. "This is a time [in the cycle] that states and municipalities typically raise money, and we will see additional growth there," de Mollein said.
ABS has its advantages as well for this sector. "In some states securitization doesn't count for their debt limit, so they're looking for innovative ways to finance, in some cases putting it into infrastructure," de Villiers said.
The state of Mexico, which issued an innovative deal last year, is expected to issue a deal backed by residential property titles, according to BofA Merrill Lynch research.
These types of government-related receivables may not stay confined to Mexico. "We are seeing it in a few different countries," de Villiers said. "It depends on the country and who holds the risk."
Argentina: Surprising Resilience
Argentina has been off the radar of many global players since the crisis of eight years ago turned the country's vibrantly international ABS sector inward.
But, in defiance of what might have seemed inevitable when the government took over the private pension fund system last year, the market did not collapse. The view for this year is guardedly optimistic as well.
Moody's put total issuance in 2009 at Ps9.8 billion ($2.6 billion), a negligible 1% drop from the previous year. S&P has the market growing a touch, to slightly more than $3 billion.
Last year, Argentina saw greater focus on servicing, as the bankruptcy of ABS issuer Bonesi led regulators to issue tighter rules to mitigate servicing risks in local deals. While some players question the wisdom of deals backed by payments that are made in cash at the servicer's branches, the market has taken a generally favorable view on the new regulations.
In addition, after the government took over the pension system, it stayed true to its word and invested in ABS deals used to fund infrastructure. This hints at where at least some activity will likely be this year as well.
But overall the nationalization didn't gut the market as some had feared. Non-pension buy-siders outside of ANSES, the social security administrator, were able to pick up some of the slack, with bank-managed funds said to have been very active in picking up ABS product toward the end of the year.
Asset classes such as consumer loans from companies and retailers, trade receivables from agribusiness and infrastructure will continue this year. "This year should be more active than last year," said Kabance. "We even might have the states come back," he added, referring to a sector that pre-crisis issued transactions backed by such assets as participation flows from the central government and royalty payments from energy companies.
There is even incipient buzz of the prodigal country's return to the cross-border market. The government is working to launch an exchange of $20 billion of its defaulted debt. Its success could pave the way for the kind of activity from Argentina that we have not witnessed since the turn of the century.
"If this debt swap in Argentina really happens, we might see some cross-border activity in the second half of the year," said Julian Broide, vice president in Latin America Capital Markets at BofA Merrill Lynch.
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