Cross-border perks up Mexicans run for cover

All of Latin America succumbed to the anticipated onset of the tight money cycle in the U.S. during the second quarter. But responses from securitization markets in the region ran the gamut. While higher interest rates only seemed to encourage originators to tap cross-border investors, issuance in Mexico's domestic market crashed. Further south, Brazil slowed down, but Argentina was unfazed, as domestic rates were already negligible. Colombia and Chile didn't make much noise, except for Latin America's first non-performing loan (NPL) deal from the former.

In a welcome change from lackluster Q1, seven originators issued internationally in the second quarter for a combined US$849 million (see table below). Some wanted to pre-empt the further increases in rates down the road. In addition, tighter money is typically kinder to structured product versus straight corporate bonds. Case in point: vanilla issuance from Latin America evaporated in Q2.

The familiarity of those that hit the markets helped as well. Brazilian commodity producers Companhia Siderurgica Nacional (CSN), Aracruz Celulose and Gerdau issued export-backed deals with standard structures. The increase in rates didn't significantly hurt the deals, as their spreads compressed from transactions in the third quarter of last year.

The second quarter witnessed the arrival of new arranger Standard Bank, which led a deal for Brazil's Unibanco backed by diversified payment rights (DPR). LatAm ABS neophyte Wachovia Securities, meanwhile, added a second transaction to its underwriting resume, a DPR deal for Banco Agricola.

Among the transactions closed in the third quarter, two snuck in quietly, both investor-driven. Banco de Credito del Peru issued a US$34 million, 10-year subordinated tranche off an existing DPR-backed US$100 million deal. German development bank GED and its Dutch peer FMO bought the deal, which carried no enhancement, and was therefore rated just shy of investment grade at BB+' by Standard & Poor's, according to a source familiar with the transaction. The coverage ratios on the existing deal had stood at 300X, giving the two banks plenty of comfort with the structure, the source said.

Another furtive deal for Banco Cuscatlan was handled by ING. Rated triple-B, the bond was a departure from the wrapped structured issued last year.

Also in the third quarter, a buzz arose about covered bonds from Central American issuers. All the rage in Europe, especially the U.K, covered bonds are paper guaranteed by a particular asset that remains on balance sheet. The concept is not foreign to Central American banks, which have issued domestic transactions guaranteed by mortgages and personal loans. The talk is that they will eventually go cross-border.

The third quarter is expected to be at least as active as the second. Banco Itau, Banco Bradesco and Banespa/Banco Santander have all awarded mandates for DPR transactions, while other Brazilian issuers are eyeing the market as well. In addition, fresh supply is expected from Central America, and Mexican housing finance company Metrofinanciera could become the first to issue a real estate-backed deal in the cross-border market.

Rates smother Mexico ABS boom

As it has for over a year, Mexico was again on the minds of global players in Latin American structured finance during the second quarter, though this time for the wrong reasons. The market that emerged as a securitization powerhouse in 2003 went limp and not a single deal came to life. "With the rise in interest rates, issuance hit the breaks," said Rene Ibarra, associate director of Fitch Ratings.

Mexican investors retrenched as the value of their portfolios shrank, particularly at the longer end. Ten-year fixed-rate peso treasurys shot up roughly 140 basis points from the end of April to the end of June. But rates have begun to settle and the pile of originators crammed into the pipeline will eventually have to cut loose. In an encouraging sign for securitizations, institutional investors have been enticed back to the marketplace by high-profile corporates American Express and FEMSA, Latin America's largest beverage company.

"The UDI benchmark is readjusting to new levels," said Mauricio Jannet, managing director of business development at GMAC-RFC Mexico. The UDI is an inflation index that benchmarks structured deals backed by such assets as mortgages or toll-road receipts. GMAC and Su Casita jointly have 342 million UDIs (US$101 million) left to issue in a program launched last December.

Among other issuers waiting for the go-ahead from investors is the state of Chihuahua with a Ps1.8 billion (US$156 million) program securitizing toll road receipts. Housing developer Casas Beta, housing finance company Credito y Casa, the state of Oaxaca and toll road Carretera Cuota Puebla are also in the wings, waiting to tap the market for a combined Ps1.9 billion (US$165 million). The third quarter is likely to see the return of issuers, but, in the longer term, mounting rates have certainly taken the steam out of activity.

Argentina: RMBS comes back life

Activity actually picked up in Argentina, where pension funds are flush with liquidity thanks primarily to a lack of investment alternatives (see table above). "We've already exceeded the volumes of last year," said Martin Fernandez, analyst at Moody's Latin America. The dominance of consumer deals held, but other asset classes absent since the crisis have been creeping back.

RMBS is the most notable. The sector earned a bad name after the devaluation effectively slashed by two-thirds the payments of mortgage bonds once denominated in dollars. Banco Hipotecario originated those ill-fated transactions. The bank returned with a Ps50 million (US$17 million) deal in late June, off a Ps500 million (US$170 million) program. Structured

by Banco de Credito & Securitizacion, the pool is heavily seasoned, with a duration on the transaction of 17.2 months. While rated raAAA' by S&P, the deal priced at 11%, fairly steep by current standards (see table p. 18). The term, however, was longer than the short-dated transactions that the consumer sector has been churning out.

Meanwhile, three units of U.S. power giant AES Corporation issued a pared-down transaction backed by existing and future credits stemming from sales to a group of large consumers. Banco de Valores and Companhia Inversora Bursatil led that deal, sized at Ps35 million (US$12 million) and rated A-(arg)' by Fitch. The three AES units that participated in the deal were Alicura, San Nicolas and Juramento.

The second quarter was not all about activity however. The Argentine subsidiary of European agribusiness titan Nidera pulled a US$20 million deal after rates offered in an auction failed to meet the company's standards. ING led the transaction.

Going forward, an undisclosed company that runs a call center is expected to securitize trade receivables, while Banco Privado de Inversiones is due to launch a Ps15 million (US$5.1 million) deal backed by credit cards. "This will be the first [general-purpose] credit-card deal in Argentina," said Mario Kenny, a partner at Nicholson & Cano. To date, only private label cards have tapped the market.

Brazil slows down

Activity also petered out in Brazil, but the slowdown was not as dramatic as in Mexico. "The uncertainty circulating in the markets also hit Brazil," said Juan de Mollein, a director at S&P.

A few receivable investment funds (FIDCs) launched shares, with flour miller and livestock

producer Predileto and auto-loan lender Omni Financeira among them. Most news, however, focused on what's up ahead.

During the quarter, heavily leveraged hydro-power producer Companhia Energetica de Sao Paulo (CESP) said it was seeking up to R$315 million (US$103 million) in a five-year transaction backed by receivables stemming from contracts with a host of companies that freely negotiate energy purchases from CESP. The would-be issuer selected three banks to manage the deal: Banco Bradesco, Itau BBA and Banco ABC Brasil.

Meanwhile, Banco BGN and Banco Schahin have personal loan-backed FIDCs in the pipeline, with initial taps likely to reach a combined R$130 million (US$43 million) for the senior tranches. Also, shareholders at Pao de Azucar, led by Rabobank, have agreed to reopen a R$500 million (US$164 million) transaction for R$120 million (US$39 million). A variety of receivables originated by units of Companhia Brasileira de Distribuicao (CBD) provide the collateral.

Colombian attention centered on NPL

Only one noteworthy deal came out of Colombia in Q2, but it was enough to turn the heads of leading emerging-market ABS players. On June 10, the country's quasi-Fannie Mae, Titularizadora Colombiana, priced Latin America's first deal backed by non-performing loans. The deal was split into a five- and seven-year tranche, with each senior tranche amounting to the local currency equivalent of US$33 million.

The International Finance Corp. provided a partial guaranty on the senior pieces for up to 5%. Fitch affiliate Duff & Phelps and stand-alone agency BRC Investors Service rated the senior chunks triple-A on the national scale. Titularizadora aims to do a follow-up NPL deal within the next couple of months for banks other than Banco Conavi and Banco AV Villas, which provided the pool for the debut transaction.

Chile moves quietly in Q2

Chile made very little noise in the second quarter, which is not atypical for the country. "Generally deals don't come out until the second half," said Claudia Basaez, head of operations at BanChile Securitizadora. Only two issues closed: an auto-loan deal by BanChile and a housing-lease transaction from Securitizadora Security.

Interestingly, some players theorize that rising interest rates will help energize the sector. "Local rates have been so low that a lot of companies are taking syndicated loans or issuing vanilla bonds" instead of going the structured route, said Octavio Bofill, a partner at Grasty Quintana Majlis & Cia.

While activity should return in the second half of the year, no one is predicting the debut of new asset classes. Down the road, players said that toll-road receipts might become securitizable. Toll-road transactions are the largest deals in Chile, but have a structure that's more akin to a project risk than ABS. While those receipts have not been securitized yet, there is a precedent: concession contracts originated by the Ministry of Pubic Works.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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