As 2002 came to a close, an audible sigh of relief wafted through the Latin American cross-border market. By all accounts, it was an appalling year for securitizations. Cross-border volume from the region shrank a dismal 43% to US$3.9 billion, according to Moody's Investors Service. Argentina's cataclysmic default in December 2001 and Brazil's election season were the major drags.
But fear wasn't the only factor sucking the oxygen from the foreign currency arena. Competitive domestic markets came into their own, with brisk action in Mexico, Chile and Colombia, despite the successive shock waves from Argentina and Brazil (see Table 4). Local currency securitizations edged up 13% to US$1.7 billion in 2002, according to Moody's.
Going forward, cross-border activity should pick up from last year. At the same time, having gotten a taste of new securitizations, domestic investors are nurturing growth in key markets. Following is a cross-border and local assessment for Argentina, Brazil, Chile, Colombia and Central America.
Argentina: 2002's nio terrible to behave better
Last year was an unmitigated disaster for Argentina, with a broad sweep of defaults souring foreign bondholders on just about every structure apart from future flows. Export-receivables deals in particular fared well, benefiting from the fact that the funds tend to be in foreign currency and are trapped abroad - remote from the devaluation and convertability risk that did in most other Argentine deals. This year is expected to turn out much better, if only because it appears the economy has hit rock bottom and the government is nearing an IMF agreement. "If they finally sign the IMF deal, that will give a lot more oxygen to the country," said Juan Pablo de Mollein, associate director of Latin America structured finance at Standard & Poor's. But apart from the furtive YPF cross-border transaction that closed Dec. 23 (see ASR 1/13/03, p.1), no one expects much of a pickup in foreign activity. "YPF is an early exception," said a source. "Only in the second half will we see other export-receivable issuance."
The domestic market fared better last year, as pension funds are still pulling in at least Ps100m (US$31 million) monthly, sources say. Apart from CLOs, most of the action will be concentrated in export and agriculture, the two sectors nicely poised to take advantage of a dirt-cheap currency. HSBC closed an US$8.8 million agriculture trust and state bank BICE priced a US$25.6 million export-backed transaction toward the end of last year (see Table 4). Others are sure to come in the first quarter. The lead-up to elections in April could put the breaks on deals and most participants foresee a more active second half.
Brazil: Giant abroad, infant at home
Despite volatility fueled by election worries, Brazil remained by far the largest issuer of cross-border securitizations last year (see volume chart). Participants expect intensified activity in 2003. "The break from last year is that we'll see more out of Brazil," said Douglas Doetsch, a partner at Mayer, Brown, Rowe & Maw. Financial future flow transactions defined the 2002 landscape, with banks such Banco Itau, Banco do Brasil and Unibanco originating paper backed by electronic money remittances, or MT100 payments. These deals will continue to play a disproportionate role in 2003, sources say. Players are also eyeing the export-receivables front. Overall, volumes should rise from last year, particularly if President Jose Inacio Lula da Silva continues to mollify investors, many of whom have been pleasantly surprised by his team's pro-market rhetoric since he took office Jan. 1. The first three months, source say, are crucial.
Compared to more developed domestic markets like Chile and Mexico, Brazil's local currency market is tiny. But dealmakers are pushing ahead with new transactions. "Our focus right now is on receivable funds," said Jose Barreto da Silva, a partner at Levy & Salomao. A new sector, receivable funds enjoy lighter tax treatment than other SPVs (see ASR 9/30/02, p.1). Backed by consumer loans, FMAX and BMG are two such deals in the works (see Table 3). Dealmakers may also move into auto loans and energy receivables, sources say.
While the domestic tone is sanguine, the market has to clear a hurdle before activity can meaningfully pick up. Every new administration tinkers with the management of state pension funds, major providers of domestic liquidity. Those potential changes have put investments in more rarefied paper on hold. "We're on automatic pilot right now," said Federico Sampaio, investment planning manager at Petros, which has R$17 billion (US$5.1 billion) under management. "In one or two months it should all be cleared up." Until then, he added, the fund will avoid unusual paper.
Colombia: Cross-border shy
Thanks to adventurous local investors and currency volatility, the Colombian domestic securitization market blossomed in 2002, while not a single deal crossed the border. This tone should more or less hold for 2003. According to Moody's, 12 securitized deals closed in Colombia last year, amounting to 34% of all domestic securitizations in Latin America. Last year saw the birth of a genuine MBS market, with Titularizadora Colombia issuing two deals totaling Ps1.1 trillion (US$375 million) (see ASR 11/25/02, p.1). Others are on the way from this endemic version of Fannie Mae. "We're going for another trillion pesos this year," said Mauricio Amador, Titularizadora's vice president of finance.
In 2003, local Colombian dealmakers will continue churning out commodities-backed deals, a sector that has quickly gained entre among domestic investors. "We should see more deals backed by agricultural products," said Felipe Iragorri, assistant director at Fitch Ratings affiliate Duff & Phelps. Sugar forward deals may be in the cards, he added. Two competing palm-oil backed transactions have been in the works for months (see Table 3). Colombian interest rates were under pressure last year due to skittishness over heightened rebel violence and Brazilian turbulence. Over the last several weeks, rates have steadied, a trend that is expected to spur on securitizations.
Chile: Still the homebody
Mirroring Colombia, Chilean securitizations embraced the local market in 2002. The only cross-border deal was a US$40 million future flow transaction backed by LanChile's airline receivables. Driving the trend were historically low domestic interest rates, which turned out to be surprisingly aloof from the Argentine explosion next door.
In fact, last year proved to be pivotal for the domestic market, as new asset classes loosened the tight grip over the securitization market previously held by the housing sector. Securitizing agencies ventured into credit cards, foreign bonds and auto loans (see Table 4 and ASR 9/16/02 p.32). The normally staid pension funds that reign over the local market have warmed up to new securitizations and other investors are dining on new deals as well.
Mexico: All about the peso
Cross-border participants are licking their chops over Brazil, but Mexican volumes are not expected to edge up much from last year. According to Moody's, there was US$198 in cross-border securitizations, a paltry number for an economy Mexico's size. As in Chile and Colombia, deals are going local. In the case of Mexico, however, the sheer volume and number of transactions are expected to be unprecedented, barring shocks from the U.S. "I've even seen cross-border firms looking to raise capital in the local markets," said Jeffrey Stern, a partner at Thacher, Proffitt & Wood.
While other markets slept, Mexico saw a flurry of securitized deals at the end of 2002 (see Table 4). The pace should remain brisk, as investors grow easier with securitizations and investable volumes swell. The fledgling pension fund sector is pulling in nearly US$6 billion annually, according to S&P. Eyes are on the housing market, with the first domestic MBS due out in the first half of the year. Federal participation revenues are sure to remain a favorite among sub-national entities, though issuers could try out new structures as well, as the State of Mexico has done with payroll taxes. (See Tables 3 & 4).
The taste Mexican penson funds have acquired for higher-rated securities is not expected to change this year, according to S&P's de Mollein: "Therefore, we expect that investors will be drawn to more stable, higher-rated structured transactions."
As a buffer against the toxic ripples from Brazil, Central American entities proved popular last year. (see Table 2). The cross-border market opened its doors for financial flow transactions from El Salvador and MBS deals from Costa Rica and Belize. This year should see more of the same, though there may be some crowding out if Brazilian issuers enjoy a full recovery.