Latin American securitization pros' catchphrase used to be "get over Y2K and everything will be fine." But January 1, 2000 came and went without any major computer meltdowns and the Latin market has stubbornly refused to pick up steam.
"Emerging market asset-backed deals offer a lot of protection but right now they are not offering enough yield pick-up," said Michael Lucente, head of Latin America structured finance at Merrill Lynch. "Issuers are not saving enough by doing a securitization in order to justify pledging their assets and many investors see no reason to buy a low investment grade emerging market bond, even if it is structured, when they can buy a similarly priced U.S. domestic bond. The value argument is just not there right now."
Several issues seem to be conspiring against the fertile ABS market that players expected to see. One of them is the quintessential emerging market predicament: volatility. From a relative value standpoint, emerging market future flow deals look unattractive to investors compared to domestic U.S. products.
"Because of continued volatility in the emerging markets pricing levels are higher than what buy-side players are willing to pay," said an investor in the U.S.
If spread volatility has made investors skittish, so has the headline risk associated with many Latin countries. "Nobody used to care about headline risk before," explained another U.S. investor . "You'd buy things in Peru, in Ecuador and in other funky places. But now you have to worry about those funky places turning up on the front page of the newspaper and having to explain to your investment committee why you chose to invest in those countries."
Market instability is not just an emerging market ailment. In fact, the volatile swings in the U.S. stock and bond markets greatly contributed to the sour Latin story.
"Stock volatility in the U.S. contributed to uncertainty in the market," said an ABS pro. "Supposedly, investments in fixed income securities and investments in equities come from two separate pools of money but it seems that there is more overlap than people would have thought."
So what is in the cards for Latin securitizations? Opinions go both ways. "A lot of good deals were done three and five years ago and they are set to mature soon," said an investor. "So if we have some market stability and if issuers have more realistic expectations regarding pricing levels we could see some transactions this year. I'm optimistic; you have to be in this business."
Others predict a gloomier future. "I think that emerging market asset-backed paper will not rally unless interest rates take off and push issuers into the markets. If that doesn't happen, I think we are looking at a pretty uncertain scenario," said a banker.