For Latin American Capital, sugar is not something to avoid, it is a way of life. The boutique investment bank has supervised a program for sugar inventory financing in Mexico for the last few years and its officers have long-established relationships with commodities. Recently, talk has cropped up in Mexico and Argentina that the specialized shop is designing asset-backed transactions for domestic institutional investors, with structures that would resemble the deals that are now sold directly to the government in the former country (see ASR 3/3, p.22).
ASR recently caught up with Latin American Capital's head of risk management, Henry T. Berry, to discuss the ins and outs of the business. Berry cut his sweet tooth twenty years ago at law firm Barret Smith Shapiro Simon & Armstrong and was subsequently involved in commodities at Merrill Lynch and Prudential Securities. In a Q&A, he spoke about the architecture of securitizing sugar inventory in Mexico and on the other Latin American markets with prospects.
ASR: How has the structure worked in Mexico?
Berry: Monetizing the inventory is basically done in a repo format. Repos are already like secured loans. The primary purpose of the structure is to avoid being stayed in bankruptcy if your counterpart defaults. You, at least on paper, have title to the goods. We have been advised on counsel that that holds up in Mexico and we're presently in the process of exploring that in Argentina. For the last several years, we've been supervising a program for the Mexican government on behalf of
development bank Bancomext. It is not resold into the paper market; this is the innovation that we're looking to introduce. To date, the purchaser has been the government itself. In the past, when I was at Prudential, we had sales to third party investors, mostly banks that are engaged in commodity [transactions]. The maturities were pretty much in the same range as CP.
ASR: Are you keen on any other markets?
Berry: In Argentina, we're in the putting the deals together phase. It's more difficult than Mexico, but we think doable. Mexico has a law in place that is very similar to that of the U.S. in regards to repurchase contracts. Brazil is possible, but it would be at least two years down the road. We're not sure the structure would work there at all. If it doesn't, then we either have to go with a different structure or not do it.
ASR: Are you interested in smaller agricultural producers in Latin America?
Berry: No, and the reason is pretty straightforward. This product requires a certain amount of research and development, legal fees and so on. We've had interest out of Guatemala, but [smaller countries] can't amass enough business to justify the kind of work entailed. As for Chile, it's overbanked and they're not a major producer of sugar. That's why we're concentrating on the big agricultural producers: Brazil, Mexico, and Argentina.
ASR: How safe have you found the structure to be in Mexico?
Berry: If you structure the mechanics of the payment flows and margin calls and all this engineering correctly, the possibility of losing money simply doesn't exist. Where does the possibility of losing money exist? If the day that the product has to be repurchased, it's not repurchased and you go to take that product to sell to someone else and it's not there. That's why we've created a separate company for this - Latin American Commodities. They administer the asset...[either] on our behalf or someone else's behalf.
ASR: And who are the beneficiaries of this financing?
Berry: In Mexico, there are ten groups of sugar mills, but the beneficiary doesn't have to be a sugar mill. It could be a merchant. It could be an intermediary that wants to refinance - that's what gave rise to the repo market in the first place. It's basically anybody who's carrying the inventory for whatever commercial reason, but in the meantime would like to free up working capital. So typically, yes, it is the mills, but it doesn't have to be. The sugar industry in Mexico is in a state of flux so it could possibly be a consumer who's concerned about the long-term ability to buy sugar.