MIAMI - At the second annual conference on Latin American securitizations, speakers offered hardheaded wisdom born of tragedy, but a more visceral mood of delight also made the rounds. "We've really finally put the crises of the last few years behind us," said Michael Lucente, director of the Latin America structured finance group at Merrill Lynch.
The climate in the cross-border market has decidedly turned from the first time Euromoney and LatinFinance held this conference, last October, when Brazilian elections and lingering fallout from the Argentine default hung in the air.
Overall emerging-market issuance through June outpaced last year's figure by three times, and benchmarks like Brazil's 2040s have hit all-time highs. Sounding a note of caution, LatinFinance editor John Barham reminded attendees, which numbered 123, that the market was "not out of the woods yet." Indeed, Argentine issuers are still overwhelmingly out in the cold, and political risk in Venezuela is a stubborn stain on deals from that country. What is more, the cross-border arena in Latin America witnessed a paltry four issuers in the first half of the year.
But it is the pipeline that folks are excited about.
In Brazil alone, CVRD, CSN, Acominas/Gerdau, Usiminas, Banco Bradesco and Banco Itau are all heard with deals in the future-flows asset class. Most of those and other deals are slated for the third quarter. Visanet already got things started last week when it priced an eight-year final credit card deal sized at US$500 million. A canvassing of summit participants suggests that July alone might leapfrog the first two quarters combined in the number of securitization issuers. Perhaps most importantly, participants shrugged off the prospect of a glut. "I still think there's pent-up demand by the private placement and insurance companies," said Gregory Kabance, senior director of Latin America structured finance with Fitch Ratings.
The previous golden years for the Latin American cross-border were in 1995-1997 and piles of that paper have been maturing. "A lot of deals are running off...there are [many] investors looking at EM issuance," said Gordon Kingsley, head of primary markets-Americas at Standard Bank Group.
Less than a year ago, many players would have balked at the image of investors lapping up structured paper. Some US$616 million of defaulted MBS by Argentina's Banco Hipo-tecario Nacional (BHN) was working the nerves of many investors, even if they did not hold the paper; Petroleos de Venezuela (PDVSA) was showing strain from meddling by the government; and Brazilian transactions were looking wobbly as elections neared.
But a year is a long time in the volatile world of emerging markets. Its vagaries are not without its rewards. Fitch's Kabance illustrated just why investors keep coming back for more. Of 183 structured Emerging Market transactions rated in single-A or below, eight have defaulted, he said, yielding a default rate in line with the triple-B category of U.S. corporate bonds. But the spreads of EM triple-B deals are consistently wider than their U.S. counterparts, a meaty 130 to 330 basis points wider in the recent past.
One question that persists for issuers to the cross-border structured market is whether to come wrapped. To date, EM deals have been evenly split between wrapped and unwrapped. Merrill's Lucente said that his bank and other underwriters have been able to consistently peddle naked paper to ABS investors at "300-500 basis points, without adjusting spreads for volatility, year in and year out." Judging by structured issuance to date, it would appear that the scales have tipped in that direction, with only a single, US$200 million tranche of a total US$750 million Petrobras transaction carrying a surety.
The expected onslaught of Brazilian issuers could sway the balance in the opposite direction, with Bradesco, Itau and CVRD rumored to have possible wraps. It is likely to be a busy summer for MBIA, as XLCA and Ambac are still indicating that Brazil is off-limits.
Bad egg in future flows
While the future flows being offered by Brazilian entities have proven their worth - especially against the existing asset class that mauled investors in Argentina - the sector still has produced at least one bad egg. In 1998, Colombian airline Avianca placed a US$75 million, eight-year deal backed by future airline ticket receivables. The company entered turbulence in 2000 and was forced to restructure its general obligations. Early amortization was eventually triggered on the structured notes until the company filed for bankruptcy in the U.S. last March. Avianca's lawyers claim that the deal was actually a secured financing, not a true sale, an assertion that could be true given the actual wording of the structure and the workings of Colombian law, according to Douglas Doetsch, a partner with Mayer Brown Rowe & Maw.
To avoid potential Avianca repeats, he suggests investors be "wary" of deals rated beyond an issuer's local currency level. In addition, "avoid structures where a sale is directly into a U.S. [trust]," he said. Offshore vehicles in the Cayman Islands and similar financial havens are preferable.
In the case of Avianca, the issuer could have still declared Chapter 11 in the U.S. even if the trust were based somewhere else, but Doetsch suggested that the receivables would have been harder to seize.
Mexico MBS on players' lips
Meanwhile, the skies are clearing for existing assets, which picked up a nasty reputation in the wake of Argentine defaults, particularly in the mortgage sector. For this asset class, the action is in Mexico, with talk of a cross-border MBS arriving before the year is up. Are investors ready for it, with memories of BHN still fresh? Susan Romo, vice president of asset finance at Credit Suisse First Boston, offers reasons why they might be. BHN, she argues, was a different animal altogether: "BHN was sold to the MBS market, the more traditional Fannie-Freddie [crowd]. It was marketed to a specific kind of investor."
In addition, Romo pointed out that Mexican state agency Sociedad Hipotecaria Federal (SHF), is providing a swap for the UDI or inflation-indexed component of mortgages. This mitigates the risk of payment, should the borrower's wages lag behind inflation. The BHN deal was dollar-indexed, but lacked a real wages swap, spelling certain disaster when the peso was removed from the dollar.
The local crowd in Mexico is eager about mortgages as well. "[The country] provides an adequate legal framework to do an MBS securitization," said Boris Otto, managing partner at Thacher Proffitt & Wood in Mexico City. Rules passed in April have clarified the notion of true sale, he added. The only mortgage transaction structured to date has been a securitization of rights to mortgages receivables, basically the cash flow.
Sized at Ps360 million (US$34 million), this deal was pulled together by Solida Administradora de Portafolios from mortgages originated in the 1980s.
BBVA Bancomer and UBS Warburg are understood to be working on the country's first domestic MBS, a Ps5 billion (US$477 million) program for government agency Infonavit. While the legal obstacles may have been swept away, Mexico has not built all the underpinnings of a robust MBS market. Essential pillars would be a wider base of trustees and backup servicers, according to Otto. Rules curbing the average maturity of pension fund portfolios are another hurdle, he said, noting, "There's a need for regulators to allow AFOREs (pension funds) to go longer."
So far, bridge loans for construction have been the leading asset class in the housing sector to be securitized in Mexico. Bridge loans and mortgages in the country add up to about US$30 billion. On average, the assets of mortgage providers have ballooned 58% a year in the recent past and the number of households will double over the next 30 years, according to Alan Elizondo, director of strategic planning at the SHF. The mortgage pool in Mexico adds up to 10% of GDP, as compared with 53% in the U.S., so growth is a sure thing. "We don't foresee demand and supply as a potential risk," said Brigitte Posch, senior analyst at Moody's Investors Service. Two leading drivers are young demographics and a brisk wedding market.