ORLANDO, Fla. Clobbered by rising interest rates, jacked-up oil prices and the threat of a slowdown from China, Latin American debt markets overall have seen better times. But in the field of structured finance, recent developments have been more encouraging. At the 3rd Annual Securitization in Latin America Summit held by LatinFinance and Euromoney, the brisk participation alone evidenced that this world is pressing on. At slightly over 200, attendance was about double the first two summits.
"I think issuance is going to be better than last year," said Violet Osterberg, managing director at Pacific Life Insurance Company. Roughly US$400 million of the US$3.8 billion debt portfolio under her management is allocated in Latin America. Fellow buysider Kurt Opperman, vice president of ING Investment Management, sees continued value in structured deals from Latin America. "Our appetite in the region has not diminished," he said, speaking
on a panel.
The incentives to stick with LatAm ABS are clear. As a few panelists pointed out, spreads are consistently higher than comparable U.S. investment-grade credits and performance in some sectors of the market, such as future flows, is nearly impeccable. In addition, many investors will continue to prefer ABS above plain vanilla paper. "We've never had a problem where a structure let us down," Opperman said.
Experience has shown that structured paper is less elastic to rates than naked deals, hence a US$200 million Ambac-wrapped placement from the likes of Brazil's Unibanco this week, while the landscape of straight corporate issuance remains bone dry. In addition, an investor retrenchment from the high yield corners of Latin America goes back more than a
few weeks. For instance, Pacific Life's Osterberg once looked at high yield, but she is now
restricted to only investment-grade bonds, a companywide rule that came into force last year. "We're looking to minimize risk and let the credit cycle play itself out,"
she said.
In an echo of past conferences, the buysiders of the panel spoke of the virtues of future flow transactions backed by dollar-denominated assets. But even an ironclad structure does not eliminate the need to do a thorough credit analysis of the originator, they warned, particularly where there's ongoing concern. And then there were the obvious events to avoid, such as originators coming to market at the same time as industry rivals, a recommendation from Osterberg that no doubt will resonate with the Acominas/Gerdau and Companhia Siderurgica Nacional (CSN), steel makers that priced within weeks of each other in the bustling third quarter of 2003.
Approach of Mexican
cross-border real estate deal
The looming arrival of existing asset deals from the Mexican housing sector was one of the other cross-border issues addressed at the conference. Because they are still bearing battle scars from the Argentine mortgage deals that blew up, the sense is that investors are wary, but willing to listen. Most of the talk is focused on the cross-currency mismatch and how to mitigate it. Here, the development of a liquid currency swap market is crucial.
"In peso-dollar, you have a fairly liquid market up to five years," said Enrique Bustamente, managing director of Latin American origination at Dresdner Kleinwort Wasserstein. "You also have to make sure you have a cross-currency swap that meets the needs of [foreign] investors as well and that gives you a competitive [cost] vis--vis what you can obtain in the local market."
Diversifying the investor base and caps on pension fund allocations in private financial institutions are also nudging originators to the cross-border. Other factors are also turning them outward (see story p. 18).
Dresdner is understood to be working on a cross-border deal for Metrofinanciera. Backed by bridge loans, the deal would not have to be as long as typical RMBS and could very well have an average life of five years, suggesting that the current swap market might be ready.
While cross-border players fend off volatility, the same anxieties have hit the domestic markets. Issuance in the two giants, Mexico and Brazil, has ground to a virtual halt over the last several weeks. "Issuers and investors are waiting to see how far rates will go," said Luis Videgaray, managing director of Mexico's Protego Asesores. "That's why so many transactions came out in Mexico in the last months of 2003 and the first months of this year."
The fundamentals, however, are still very much present and the conference was brimming with optimism over the medium- and long-term prospects of domestic markets. Fitch Ratings Senior Director Gregory Kabance predicted that this would be the first year in which the region's domestic markets combined will eclipse the cross-border arena in volume (see Brazil, above).
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