News centers on PDVSA/Gazprom
Latin American exporters shunned cross-border securitization in the third quarter and banks picked up some of the slack. Despite anxieties earlier in the year, interest rates remained amenable to straight corporate issuance and bank loans, sucking the energy from ABS and future flows. "With the spread compression, [originators] can go without structured deals," said Willem Sutherland, head of Latin America securitization at ABN AMRO. And, looking ahead, the fourth quarter is unlikely to dazzle. Chances are the rate environment won't change dramatically enough to stimulate Latin securitizations over the next couple of months and the Brazilian banks that supplied the oxygen in the third quarter may lay off for a while, given their recent activity.
The four bank deals amounted to $710 million. All were backed with diversified payment rights, which essentially cover the electronic money processed by banks.
Apart from the debut of a leading originator from Brazil - Banespa/Santander - arguably the news that most stirred the Latin American securitization industry had nothing to do with fresh supply from the region. Two events hogged the spotlight in mid-summer: a buyback that virtually wiped out the total $2.6 billion of structured finance notes placed by once-reliable issuer Petroleos de Venezuela (PDVSA) and a breakthrough export-backed bond from Russian gas giant Gazprom.
For many investors, PDVSA was an easy habit to break. In a remarkably short period of time, the company deteriorated from a darling of future-flows bondholders to a poster child for what can go wrong when a government politicizes the management of a state-owned enterprise. A strike that ran from November 2002 to January 2003, and other signs of discontent with meddling by the Hugo Chavez administration only appeared to harden the president's resolve to gain full control of the company. While coverage ratios for the paper stood high thanks in part to soaring oil prices, rating agencies perceived a precipitous drop in credit quality.
In the wake of the buyback offer launched in the last days of June, paper that was once investment-grade was Caa1'/'B+'/'BB-' at Moody's Investors Service, Standard & Poor's, and Fitch Ratings, respectively. Deutsche Bank Securities and JPMorgan Securities arranged the repurchase.
Investors that agreed to sell back their bonds at the offered price would automatically okay covenant changes, a move that for some was tantamount to strong arming by PDVSA. Since bondholders couldn't be sure what their peers were going to do, the safest bet was to bail, since covenants might be weaker, depending on how much deleveraging took place.
In the end, a paltry $100 million remained outstanding of the total $2.61 million. The irony is that the remaining bondholders might end up as the biggest winners. The weakening of covenants would have hurt if a larger minority had hung on, but with such a small debt load, the coverage ratios are now exceedingly high. Another, better offer from PDVSA could be in the cards, sources said.
As for funding, the company might be able to better capitalize on its assets in the banking market, according to one source. "The capital market wasn't giving them much credit for tying up a lot of assets, so maybe they could get that credit from banks," he said.
Elsewhere in cross-border territory, Russian exporter Gazprom issued an export-backed transaction sized at $1.25 billion, dwarfing comparable deals out of Latin America. A first for Russia, this transaction could be heralding new opportunities for bankers traditionally focused on Latin America. In fact, the players involved in this particular deal no doubt tapped into their wealth of experience in Latin American future flows. Leads ABN AMRO, Merrill Lynch, and Morgan Stanley and legal counsel Linklaters are securitization stalwarts in the region.
Up ahead in Russia is a credit card-backed deal from Rosbank, rumored at $200 million. The structure will resemble Gazprom's in some ways, according to a source familiar with the transaction. Merrill and Credit Suisse First Boston are reportedly leading the deal.
Beside the banking deals, Jamaica's National Commercial Bank upsized and termed out a previously five-year $125 million credit-card backed transaction issued in 2001. The new size is $200 million and maturity, Oct. 7, 2009. Led by Citigroup Global Markets, the deal is reportedly in one of the bank's conduits.
For the fourth quarter, players will be watching the progress of an upcoming $100 million real estate receivables transaction from Mexico's Metrofinanciera. A good performance might bode well for the arrival of more onshore asset deals into the cross-border market. The Argentine crisis virtually stomped that sector out a few years ago.
At the end of the third quarter, Fitch and Moody's rated the deal BBB' and Baa1', respectively.
In the Metrofinanciera deal, a unit of sole lead Dresdner Kleinwort Wasserstein is providing a currency swap, which should allay concerns over what is typically deemed the biggest risk of these kind of transactions: the mismatch between the denomination of the collateral and the bond.
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