Dealmakers, issuers and investors in Latin American structured finance are often quick to point out that they've been spared the worst brutalities of the global financial crisis and the more recent sovereign debt anxiety in Europe, with the exception of the nonbank real estate sector in Mexico.
But the region's devotees will have to do more than dodge bullets to craft a next generation of deals and foment both cross-border and local pools of investors that are a better match for the depth of Latin America's investment needs.
These were the issues tackled by participants at SiLAS 2012, held by Euromoney Seminars and LatinFinance.
The mood was stoic and studious, with newer participants packing the conference room and would-be issuers approaching more seasoned ones about how to structure the deals that investors want.
The investors at the conference reminded us that grim prospects and low returns in the more developed world did not necessarily mean they were embracing Latin American structured paper with open arms. Sometimes the alternatives within the region looked better.
Jorge Unda, chief investment officer for the Latin American operations of Spain's BBVA, was blunt about the downside to investing in structured finance: "We have to waste a lot of time," he said.
The spreads compared to corporate deals of the same creditworthiness are often not worth the extra research that structured deals entail, he added.
Violet Osterberg, managing director at Pacific Life Insurance, spoke on a panel covering infrastructure deals. She acknowledged the needs and potential of the continent but had a meticulous checklist of conditions that must be met for a deal to be an investment candidate.
The criteria include requiring that the deal be domiciled in a preapproved country with a strong jurisdiction; robust cash flows; a debt service account; and paper denominated in dollars, among other conditions.
While insisting on dollar payments, Osterberg is not completely allergic to FX risk. She cited an investment in the co-participation sector in Argentina - deals backed by transfers from the central government to provinces or municipalities - that carried some FX risk which was mitigated, however, by a structure that worked well. "That's a risk we'll underwrite," she added.
The criteria for investing are only becoming more stringent, Osterberg said, due to new rules from the National Association of Insurance Commissioners.
Indeed, while Latin America has been able to avert the financial gales buffeting Europe, it must still face regulatory change, as pointed out by Juan de Mollein, managing director of Standard & Poor's and conference chairman. In Brazil, for instance, a new rule analogous to Regulation AB is causing consternation among servicers and custodians.
The sort of behavior that regulators are looking to curb is still an issue, according to Unda. He cited conflicts of interest that emerge, for instance, when an investment bank is hawking a deal that has been partly sold to a private banking arm in the same group. "They turn to the market and say, 'Look, I already have a book of 20%.'" Unda said. This would compress the spread and essentially create the illusion of market demand. "I think a Chinese wall [at a bank] shouldn't be only in terms of information; it should be in terms of decision making," he added.
Others spoke of the cumbersome process of finding a fair spread for deals in the region when liquidity is still nowhere close to that of the U.S. structured finance market.
"We would love to be able to manage credit the way they do in the U.S. markets," Unda said.
The upshot is that, in attracting foreign investors, Latin American players still have their work cut out for them, although the crisis in Europe may make the exercise easier for some.
As European warehouse lenders pull back, other investors are stepping in, said John Rauschkolb, CEO of Panamanian mortgage lender La Hipotecaria. "When the crisis came, it flooded our markets with liquidity," he said. There was a lull in this effect as the developed Western economies looked to be getting back on track. "Now, it's the same phenomenon - liquidity is coming back," Rauschkolb added.
Still, a recurring theme at the conference was that the region needed a more stable foundation of investors, and that the sell side had to look beyond the single deal in order to make this happen. Mollein pointed out that a base for a more solid structured finance market is there, at least on the sovereign side. In 10 years - since the first SiLAS was held in 2002 - S&P's global map of investment-grade countries has dramatically changed. Chile was then the lonely investment-grade outpost in the region. Now it's joined by Brazil, Peru, Mexico, Uruguay, Panama and Colombia.
