It wasn't an easy year by any means, as economies across the globe slowed and the world became entrenched in fears of terrorism. However, as far as the debt market in Latin America goes, it wasn't such a poor showing, at least in comparison to the prior year.


"In spite of Sept. 11 and the problems in Argentina, a few deals did get done before year-end," said one MBIA analyst. And, while this seemed to be the rather sad upside of recent events, there were some overall notable highlights in Latin America's 2001 securitization market.

According to Moody's Investors Service total securitized issuance in the region jumped to $6.96 billion in 2001, from the $2.95 billion lull in 2000. The number of deals also surged to 24 from only 14 the prior year.

Brazil soaked up 57% of the volume in cross-border transactions in 2001. Market participants agree that some of the year's most noteworthy deals emerged from Brazil.

2001 innovation

Banco Central do Brasil graced the market with the country's first-ever financial future flow transaction. Merrill Lynch led the $250 million fixed-rate, worker-remittance deal. Nikkei Remittance Trust was established in Banco Central do Brasil in Japan so that Brazilians working in Japan are able to deposit yen or American dollars into the trust and the money is then transferred to the assigned account in Brazil in real. (See ASR 07/23/01).

Banco do Brasil's deal opened the market for other MT100 deals across the region, including its own second similar deal for $300 million, also led by Merrill, which closed in December.

AES Tiete was also a deal of the times. Tiete Emprendimiento, a Brazilian subsidiary of the U.S.-based utility company AES Corp., sold a $300 million securitization bond via Banc of America with an all-new devaluation insurance policy from the Overseas Private Investment Corp. (see ASR 4/23/01 and 5/7/01). While the deal was innovative, as it was the first deal to ever feature a devaluation insurance policy, it also evoked a great deal of confusion. According to some market sources the transaction was not well sold, since it still obtained a fair level of risk and investors were unclear as to how OPIC could provide a product as abstract as devaluation insurance. "The deal was not straightforward and it still had a lot of risk," said one market participant.

Other Brazilian deals that added quite a bit of color to the market were the subordinated debt issues from Bancomer and Banco Itau. "These deals were equally unprecedented," said one Merrill Lynch source. The Bancomer transaction was the first-ever hybrid security done in the region and the Banco Itau transaction made history as the first subordinated issue in dollars and yen. "[Banco Itau] was subordinated and [Bancomer] was deeply subordinated," the Merrill source noted. "European banks have been issuing hybrid securities and subordinated debt for years as have U.S. banks. As a result, the U.S. banks and the European banks are extremely well capitalized and they have also had a huge competitive advantage."

Unlike the prior year, 2001 was packed with more variety in issuers. In 2000, Mexico, Argentina and Brazil were the only market players. Unlikely countries were able to hit the market in 2001, including Panama, Trinidad and Tobago, Peru, Venezuela and Jamaica.

"Some of the more obvious markets were out of favor this year - if people can't do deals in Argentina and they need to do deals in Latin America or Central America, they may look in places that they might not ordinarily look in," suggested Pat Kearns, analyst at Fitch.

Outside of Brazil was Venezuela's state-owned oil company, Petroleos de Venezuela S.A.'s (PDVSA) $750 million transaction, led by UBS Warburg. The transaction featured political risk insurance and, as a result of its size, marked a major development in the PRI arena.

Looking ahead to 2002

Brazil is expected to remain the predominant player in the Latin American securitization field, although the effect of the Argentine contagion is still unknown. Mexico and El Salvador are also expected to tap the market again this year. In light of the Argentine crisis, Argentina is not likely to make a foray this year, as sources have growing concerns for the legal regime.

Moody's expects the issuance of cross-border structured transactions to remain strong throughout the first half of 2002, assuming that the interest-rate environment remains attractive. Uncertainty in Argentina may increase the attractiveness of structured transactions at the expense of straight corporate bond issuances. However, Moody's also expects that investor appetite for bonds issued by any entities other than repeat issuers or top-tier names in a given jurisdiction will be limited.

The downside of 2001

As the world slipped into an economic slowdown and terrorism struck the U.S., igniting uncertainty among structured finance transactions across the globe, Argentina also fell far down the rating chain, to DDD- at the three rating agencies. The country started out in 2001 with a bit of uncertainty and only brought transactions that had been in the pipeline from the previous year. Argentina seemed to hit its low of the year last week, when the country chose its third president in two weeks time.

Now fearing a devaluation, which would likely have the greatest impact on existing mortgage-backed securitizations, a report released by Standard & Poor's last week stated that the solution to the financial crisis remains one of the main challenges facing the most recently appointed President Eduardo Duhalde. In recent weeks, banks have been performing only limited functions, with no currency exchange operations and deficient clearing activities, seriously jeopardizing the already vulnerable chain of payments of the Argentine economy.

While the announcement of a new economic plan is scheduled for this Friday, the new president's inaugural speech predicted the end of the one-to-one peso-dollar parity, as well as the government's intention to preserve dollar-denominated savings while devising some kind of relief mechanism for dollar debtors. According to S&P, the new administration's ability to craft a meaningful approach will be difficult given the necessary painful trade-offs in the context of a tenuous political environment.

As a result of the problems in Argentina, the outlook for Latin America is uncertain and, for sure, the market has lost a major group of investors, putting stress on structured deals in general for the year ahead.

"Deals of all types will now be tested - so far so good, but the rules might change any minute," said the source at Merrill. "Conceivably, if things go adversely, it could have a big impact on the market."

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