Brazilmania swept the cross-border market in the third quarter. Nine issuers took advantage of a balmier climate, placing a total US$2.2 billion in ABS, double the volume of the previous six months. As the new Brazilian President Luiz Inacio Lula da Silva turned out to be more of a market pussycat than bete noir, foreign investors purred. "[They] realized Lula wasn't the monster they had feared," said Michael Morcom, associate director at Barclays Capital. Other factors goaded on issuers as well, such as still-modest interest rates and a wider pool of investors weary of low-yield product.
With Argentina off the field, beyond Brazil the only country in the region with the potential to crank out cross-border volume was Mexico. But originators in Mexico had turned inward, first from necessity in the hostile international environment, and then to tap into attractive interest rates, swelling local liquidity and locals' fading aversion to structured product.
Meanwhile, even though the new leftist president was endearing himself to market players, local treasury rates in Brazil remained steep enough to stifle large issuance in local currency and the dollar denomination of the preferred asset classes made U.S. investors the natural audience.
While Banco do Brasil and Argentine oil company YPF tapped investors in the second quarter, it was market regular Petrobras that helped set the tone for the Q3 gush. Pricing a US$750 million deal split into two tranches - one wrapped by MBIA, the other unwrapped but investment grade -, the oil giant set a benchmark for investors ready to ditch their hangovers from the Argentine crisis. Citigroup and BBVA led the Petrobras transaction, which was backed by receivables from export sales of heavy fuel oil and bunker oil.
Groundbreaking deals also arrived in the third quarter. Pricing in early July, Brazilian merchant voucher receivables became the first credit-card deal from Latin America originated by a non-bank entity. The issuer, Visanet, placed US$500 million in a deal with a legal final maturity of eight years. Merrill Lynch was the lead on the transaction. For several years, Visanet has been responsible for the processing and marketing of Visa in Brazil.
Following its more seasoned peers in the financial sector, Banco Bradesco dropped in for the first time with a standard transaction backed by diversified payment rights (DPRs) generated through its international banking operations. Handled by ABN Amro, the Bradesco deal was sized at US$400 million and in Petrobras style, was split into an unwrapped and wrapped tranche.
Exporters made up the other main group touching down in the third quarter. In all, steel producers CSN and Acominas/Gerdau, wood pulp maker Aracruz and iron ore giant CVRD issued US$1 billion worth of receivables securitizations.
Signaling that investors were ready for higher risk product, many issuers showed up to the party unwrapped, often earning ratings that were on the cusp of investment grade. Another reason why some chose to forgo a guaranty was a shortage of supply. The traditional players in the sector, XL and Ambac, continued to keep their distance because of ample exposure to Brazil. MBIA has basically been holding the Latin court since the beginning of the year and is behind deals for Bradesco, Petrobras, Banco Itau and CVRD. The insurer has taken on US$800 million in structured Brazilian risk this year. The only exceptions were Argentine oil producer YPF and Banco Cuscatlan from El Salvador, both of which had an XL surety.
Inquiries by CDC IXIS Financial Guaranty (CIFG) into Latin American transactions have stirred speculation that the company is gearing up to enter the region. The guarantor has been heard courting Brazilian issuers.
The only event to disrupt the Q3 carnaval was the default of DVI medical equipment ABS. Up through September, a securitization of Brazilian lease receivables originated by a unit of DVI, Medical Systems Finance, had kept largely aloof from the troubles of its parent. Then Moody's downgraded the multi-tranche deal, with a whisker under US$19 million outstanding from the initial volume of US$80 million. DIV's distress "could adversely affect the ability of Medical Systems Finance to effectively service the securitized notes," the agency said in a report released Sept. 29. The senior piece was dunked to Baa2' from A2'. Standard & Poor's has taken a more sanguine view, with its A' rating on the senior tranche on NegativeWatch since Aug. 14.
A more heartening event was the appearance of a new player in the field of LatAm ABS underwriters. Wachovia Securities snagged a mandate from El Salvador's Banco Agricola for a deal backed by diversified payment rights (DPRs), according to sources. The bank is not exactly a stranger to DPR either. It is a leading processor of payments headed to Latin American banks.
Looking ahead to the remainder of the year, activity should drop off from the brisk third quarter and attention is likely to turn to Mexico, which has been a non-entity in the cross-border market so far this year. The dollar-denominated Mexican MBS deals that players have been talking about for over a year have taken longer to appear than many had thought (see Mexico p. 22) but they might still debut before 2003 is out. "You've had two developments: you can get [currency swaps] with a longer tenor and Mexico is a consensus investment-grade country," said Emil Arca, a partner at Dewey Ballatine.
Kleinwort Wasserstein is heard with the mandate to execute a dollar-denominated deal for housing finance company Metrofinanciera, though it is unclear whether the underlying assets will be bridge loans for construction or mortgages. CSFB is understood to have a mandate from Su Casita and GMAC. Initially talked as a cross-border deal, sources say it initially will be domestic.
Elsewhere, BBVA Bancomer is expected to issue a credit card securitization via Nesbitt Burns. And Citibank is readying a deal for Redecard in Brazil along the lines of the Visanet transaction closed in Q3 (see above).
Mexico keeps them coming
Mexico's domestic structured market kept plowing ahead in Q3, with eight deals closing. A few transactions underscored the steady evolution of the peso market. MBIA provided its second-ever wrap of a domestic deal, enhancing a toll-road transaction for Pacsa worth 1.46 billion inflation indexed units (UDIs) (US$430 million). The state of Veracruz became the second issuer to tap payroll taxes in a Ps450 million (US$40 million), keeping alive an alternative to the federal co-participation revenue that has been the asset of choice for sub-national issuers. Another indication of a growing market was the issue of a Ps500 million (US$45 million) transaction backed by consumer loans on Sept. 30. The originator, state credit agency Fonacot, is expected to return in the medium term, and other companies are said to be eyeing this funding option, which had been hibernating since department store Elektra closed a program in mid-2002. Sources
have cited Sears, El Puerto de Liverpool, El Palacio de Hierro, Singer, and Samsa as leading originators and potential issuers.
On the housing front, talk of a proper MBS market - both domestic and cross-border - is still in the air, although the giddy enthusiasm of earlier in the year has worn off a bit. "We thought it was going to be more active," said Marcela Pino, director of institutional trust services at JP Morgan Mexico. Many players had expected a domestic MBS to materialize by now, but all there has been is a Ps340 million (US$30 million) securitization of cash flows from mortgages.
Argentina sticks to consumer, export assets
While the paltry volumes of Argentine deals scarcely changed, the frequency of transactions picked up in Q3. A full five deals closed, which may surprise the cross-border observers who thought this market had yet to rise from its post-default ashes. On the other hand, there are only two asset classes that have glommed onto the recovery: consumer credit and export-linked collateral. With vast expanses of the economy stuck in rigor mortis, other assets, such as mortgages, have yet to return. Among the more noteworthy transactions that closed in Q3, the International Finance Corp. bought a portion of a CLO arranged by HSBC, Banco Rio de la Plata and BBVA Banco Frances. The beneficiaries of the US$20 million deal were a handful of major exporters. The four other transactions were in the consumer sector, backed with either loans or credit card vouchers.
This general tone should hold for the rest of the year. There is talk, however, of a cross-border deal in the works for energy company Petrobras Energia, formerly Perez Companc. Rumors have been circulating that this unit of Brazil's Petrobras may come to market with a structure similar to the furtive YPF transactions closed in late 2002 and early this year, but a mandate recently handed to Merrill Lynch for what appears to be a corporate deal may preclude the structured transaction.
Brazil quiet at home, apart from funds
Brazil's domestic market was quiet in Q3, save for a sizable private deal executed and reportedly bought by Rabobank. The originator is Companhia Brasileira de Distribuicao and the collateral is a variety of existing receivables, such as credit cards, food vouchers and pre-dated checks, according to a source on the deal. Sized at R$500 million (US$175 million), the transaction is an FIDC, a structure that combined features of an investment fund and a traditional special-purpose vehicle. With an enhancement from subordinated shares, the R$400 million senior chunk
is rated AA(bra)' by Fitch Atlantic.
Another FIDC also launched last quarter. Finance firm Ideal Invest opened a fund backed by tuition receivables. S&P rated that deal brBBB+'.
Colombia was fairly subdued as well during the third quarter. The only issue came from brokerage Correval, which made an initial two peso issues off a program securitizing dollar-denominated CSFB notes. The placement of this cross-currency structure amounted to Ps188 billion (US$66 million). The deal gave CSFB the chance to balance currency risk as the bank provided the swap covering the deal. Correval has securitized other paper from abroad in the past. The deals are profitable largely because they provide the only opportunity for Colombian investors to buy foreign paper, albeit indirectly. Local regulation bans pension funds from purchasing overseas notes.
Despite a dearth of issuance, Colombia's securitization world yielded some dramatic news. A cattle-head backed deal was downgraded due to sketchy behavior by a couple of originating ranch owners. The cows, which were being sold on the sly, carried the brand of the trust, making them easily identifiable to the final buyers.
Up ahead, Titularizadora Colombiana - that country's Fannie Mae - is slated to issue its fourth MBS in the second week of November. Structurally identical to the last one, the deal is sized at Ps478 billion (US$167 million).
Chile MBS and new asset around the corner
Finally, Chile saw its largest-ever MBS issue on Aug. 29. Sized at Ps3.84 million inflation-indexed units (UF) (US$101), the transaction was led by BCI Securitizadora and the originator was Santander. A unit of BankBoston also closed its inaugural deal in Chile. The collateral was housing leases, well tested in the domestic market.
For the fourth quarter, the market's second auto loan transaction should price, as well as a novel transaction backed by advertising contracts. Bice Securitizadora is handling both.