A film critic with an odd side interest in Latin American securitizations might give this review to the second quarter: "Mexico was a tour-de-force, a pent-up pipeline in the cross-border failed to unravel, and the smaller domestic roles played by Chile and Brazil opened new asset and vehicle sub-plots." In all, a mixed bag.
The domestic currency market in Mexico pumped out US$675 million in securitized bonds, more than double the preceding quarter (see 2Q domestic record). No other domestic market came close. On top of that, new asset classes were broken in and the monoline wrap in pesos debuted.
Overall domestic currency issuance in Latin America tracked by ASR hit US$1.04 billion, from US$403 million, both computed at current exchange rates.
The cross-border again disappointed, with two issuers coming to market, the same meager number as in the first quarter. "It was much more quiet than everyone expected," said Michael Morcom, associate director at Barclays Capital. "But there's a good potential pipeline of candidates." Indeed, toward the end of the quarter the pipeline was bursting at the seams and all signs point to an exponential increase in both volumes and numbers of issues in the third quarter. The first week of July alone, three Brazilian issuers were expected to tap the dollar market.
Mexico told a few compelling stories in the second quarter. One had MBIA as a protagonist. The guarantor wrapped a Ps1.94 billion (US$186 million) transaction for two units of infrastructure company Tribasa, the first peso deal for a monoline (see ASR 6/9, p. 22). Echoing similar deals done in Chile, the surety raised tough questions about pricing. While the wrap effectively elevated the deal's rating to above the sovereign, local investors were loath to price under their benchmark treasurys. Still it ended up pricing far tighter than any previous structured deal rated triple-A on the Mexican national scale.
Just in time to make the second quarter, the Mexican municipality of Tlalnapantla broke in new asset classes, closing a Ps96 million (US$9.2 million) deal backed by water and property taxes. Deutsche Bank placed the deal and Protego Asesores was the structuring agent (see ASR 4/27, p. 20). This marked the second transaction among sub-national credit to tap locally generated assets as collateral. The first came from the State of Mexico in the form of a multi-issue securitization of payroll taxes.
The Tlalnepantla deal priced at an inflation-indexed 5.5%. The results are heartening for public entities looking to diversify away from federal participation revenues, the asset of choice for nearly all deals to date. "It's more a true ABS than the quasi-government deals done before," said a source on the transaction. "This was to test the market and demand was healthy." Europe's Dexia Credit provided a letter of credit covering nearly all the deal at issuance. The LC, in turn, is one-third backed by the International Finance Corp.
Along with MBIA, the participation of Dexia and the IFC have underscored mushrooming opportunities for international guarantors in Mexico's domestic market. New providers of sureties are expected to pop in during the second half, while those who have taken root may enhance more deals.
Among closed deals, the housing sector in Mexico did not offer much during the second quarter in the way of novelty. But the field was abuzz with talk of exciting things to come. For some time, mouths have been watering over the potential of the massive mortgage market, which has yet to produce a proper securitization in the domestic or cross-border markets. In the second quarter, it surfaced that UBS Warburg and BBVA Bancomer won a mandate from government agency Infonavit for an MBS program totaling Ps5 billion (US$478 million) (see ASR 6/16, p. 1)
Another deal in the works is an MBS from Solida Administradora de Portafolios, a member of the Banorte family. Sized at Ps360 million (US$34 million), the transaction is a securitization of cash flows from the mortgages rather than the loans themselves, sources said. This raises questions about the Infonavit deal as well. Apparently in Mexico the true sale of mortgages is very difficult, whereas transferring rights to the cash flow is not.
Talk is picking up of a cross-border MBS as well. Rumors are circulating that CSFB has snagged a mandate to craft such a deal for Su Casita, a major housing finance company or Sofol. The feasibility of going cross-border remains in doubt, however. Long-term cross-currency swaps - a prerequisite for such a transaction - are heard available for terms stretching beyond 10 years. "Whether they're reasonably priced is a different story," said a source from one Sofol.
The cross-border was quiet in the second quarter, although a crush of issuers in the pipeline indicates the third quarter will be anything but sluggish. Only two Latin American issuers tapped the dollar market and both were from Brazil. One was Unibanco, which placed a US$225 million deal backed by diversified payment rights; the other was oil giant Petrobras, which tapped investors for US$750 million. Both deals had two tranches.
While US$200 million of the Petrobras transaction was wrapped by MBIA, the other, bulkier tranche - and the entire issue from Unibanco - came unwrapped. "Due to the scarcity of monoline availability, some issuers found that the market was deep enough for unwrapped paper," said Gary Kochubka, director of structured finance ratings at Standard & Poor's. Of the deals in the short-term pipeline, only Banco Itau has definitely secured a wrap for a Nomura-led transaction sized at US$200 million and backed by diversified payment rights.
Following Petrobras' footsteps, exporters piled into the pipeline during the second quarter. That marked a turnaround from the same period last year, when financial future flows were the only asset class from Brazil that investors would swallow. Sandwiched between the Argentine blowup and Brazilian elections in October 2002, in Q2 last year exporters were shunned by the market. Petrobras proved sentiment had turned with its issue and others are following suit.
At press time, Brazilian steelmaker CSN had priced a deal reportedly sized at US$142 million, while a deal for at least US$100 million from industry peer Acominas/Gerdau is due out this week (see ASR 6/30, p. 25). Not far behind is iron ore producer CVRD, with a US$200 million transaction that may carry a wrap from MBIA.
Also only a few days into the third quarter, Visanet priced an upsized US$500 million deal via Merrill Lynch (see p. 19).
The third quarter may witness a rare deal may out of Central America or the return of one or two issuers from Mexico, but Brazil will continue to monopolize the cross-border arena. Insufficient volume and cheaper funding in domestic currency are still keeping other Latin American issuers at home.
Colombia stayed true to form in the second quarter, as the commodities sector remained an engine of issuance. Incauca and La Cabana, both sugar refiners, floated deals for a combined Ps120 billion (US$42 million). Backed by sugar forward contracts, the Incauca transaction went to refinance dollar debt, among other things. Lead Mercancias y Valores, an accomplished arranger of commodities deals, is edging into new assets as well. "We're moving forward with a securitization of banana exports for a large international company," said Carolina Castellanos, a broker with Mercancias.
While Incauca and La Cabana kept the commodities sector alive, two other deals in the palm-oil sector have languished in the pipeline for months. Volume in the second quarter was unimpressive as well. "We know there's liquidity out there, but activity was quiet [in the second quarter]," said Patricia Gomez, an analyst at Fitch Ratings affiliate Duff & Phelps.
As in other Latin American markets, investors' distaste for paper below double-A has been freezing out issuers. And another deterrent appears to have grown more daunting. Dwindling banker fees may be compounding the traditionally painstaking work of building a structured deal. "Some have lost the incentive," said Rafael Gonzalez, president of BRC Investor Services, formerly BankWatch Ratings.
One bright spot in the Colombian market has been housing finance. Titularizadora, that country's version of U.S. GSE Fannie Mae, made its third issue of RMBS for a total of Ps449 (US$160 million) on June 19. With that, Titularizadora has securitized 12% of the country's residential mortgage pool, estimated at Ps13.5 trillion (US$4.8 billion).
New assets may surface in the second half of the year. Apart from Mercancias' banana deal, a major car company is mulling a securitization of export or domestic sales receivables. Potential regulatory changes may nudge some borderline issuers into the market as well. Aimed in part at tightening standards at brokerages, the law would professionalize the business. That, sources said, may endear more investors to debt issuance.
With neither the volume nor energetic adolescence of other Latin American markets, Chile nearly succumbed to dull middle age during the second quarter. Instead, rejuvenation came with the regional debut of college tuition as an asset class. Two deals priced. One, amounting to 2 million inflation-indexed units (UF) (US$49 million), was structured by Securitizadora Interamericana, an arm of American International Group. The deal was the financial behemoth's inaugural transaction in the domestic market. Sized at 1 million UF (US$24 million), the other transaction was structured by Ernst & Young and ABN Amro Securitizadora. The International Finance Corp. provided a guarantee for the latter deal, which had Universidad Diego Portales as originator. The IFC has indicated it would enhance other deals.
Besides the tuition pair, the structured finance market in Chile ground to a halt in the second quarter. Bankers failed to make good on the promise of more deals in the credit card sector, which came to life only late last year. Perhaps a gloomier sign for long-term growth, the appeal of mortgages has been fading. The securitization business works basically on the excess of spread between the mortgage rates and the bond price, said Alejandro Sierra, director of Moody's Investors Service affiliate Humphreys. But rates have plunged for homeowners, crushing the margins for bankers. "They'll have to find other ways to finance the deals," Sierra said. Once the staple of the domestic market, no MBS has priced in Chile in the year to date, though a couple are in the works.
As for new entrants, a major wholesale company is contemplating the securitization of sales receivables. Credit cards.
Activity was muted in Brazil's domestic market, though a new fund vehicle forged ahead. Receivables investment fund (FIDCs) had been touted since mid-2002 as a way for issuers to bypass the suffocating taxes heaped on more traditional SPVs. The new vehicle got off to a rocky start, but made progress in the second quarter. Banco BMG sold all the shares in a closed-ended FIDC worth R$104 million (US$37 million) and backed by personal loans. Pension funds were the major buyers.
After some false starts, financial consultancy Hampton Solfise launched an FIDC totaling R$136 million (US$48 million) and by the end of the quarter nearly R$23 million (US$8.2 million) of shares were subscribed. Known as FMAX, that deal is backed by consumer loans. The arranger is aiming for a disperse investor base. "We're placing it with private banking investors," said Hampton Solfise Managing Director Patricia Bentes. Servicing glitches caused delays in the FMAX deal and have been cited by other sources as deterring bankers from securitized deals. By tackling those problems, the first FIDCs may have smoothed out the road for future deals.
Going forward, the Brazilian government has passed incentives for building multi-asset securitizations in the infrastructure sector. The idea would be to finance a project encompassing various sectors such as utilities, low-income housing and shopping centers. The government will arrange for the purchase of up 30% of deals backed by approved assets.
In terms of issuance, post-default Argentina remains a wasteland with small pockets of life. The export sector is still alive and hungry for financing, even though no deal closed in the second quarter.
Issuers may fare better this quarter, following a decision by the IFC to purchase up to US$10 million of Exportadores II, a deal up to US$30 million, backed by loans to exporters. That transaction would be a followup to Exportadores I, which closed in the first quarter for US$15 million and was arranged and originated by BBVA Banco Frances, Banco Rio de la Plata and HSBC Bank Argentina. This time around, the banks are aiming to fund lesser-known companies than the big names financed previously. "The export sector is going to keep moving forward," said Eduardo D'Orazio, director of Fitch Argentina.
The only deals to close in the second quarter were out of the consumer sector. Badly bruised by the crisis, consumer loans have been on the upswing since early in the year. Amounting to a combined Ps21 million (US$7.5 million), both transactions have come from Consubond, backed by consumer loans originated by Banco Saenz.