One of the recurring themes at the SiLAS 2010 conference was the need for investors to get to know the collateral behind deals like never before.
This, naturally, means involved analysis. "If we don't understand a transaction, we don't buy it," said Jorge Unda, managing director of investments at BBVA Bancomer Asset Management. Unda has, on average, overseen assets of Ps481 billion ($37 billion) over the last two years, with clients ranging from pension funds and insurance companies to mutual funds and high-net-worth individuals. His division is the largest holder in Mexico for corporate and structured debt.
Unda went on to say that asset mangers need to look not only at the collateral but also at how to develop a relationship with the originator and servicer. "You have to be willing to have a partnership with these entities for many, many years," he added.
More thorough analysis from Latin American investors implies, among other things, a move towards simpler structures and a potentially reduced role for rating agencies.
Unda minced no words when referring to the latter: "Of course there's a conflict of interest," he said. "The issuers pay the rating agencies, so you can't take for granted what they're doing."
Another buy-sider at the conference said issuers needed to start providing investors with the same depth of information as they provide the rating agencies.
But everyone agreed there was a role to be played by the rating agencies.
"The rating agency is going to remain," said Pedro Cutolo of Vision Brazil Investments. "But the buyers are going to be relying on that. An investor needs to understand better what the rating agencies are doing [and] to whom they have applied their analysis."
Participants noted that investors had not been doing their homework and could not in good faith place all the blame on rating agencies for high scores on deals that eventually went sour.
Ignacio Farias, CEO of nonbank housing finance company Patrimonio, related an anecdote in which a leading investor in Mexico called the originator to ask what was in one of its deals, not because the investor was interested in buying the transaction but because the investor had held this transaction for some time.
One thing is certain for Latin American ABS issuers: They will need to continue depending on local investors, despite efforts to bring new cross-border deals to market, especially in the realm of infrastructure. The flip side of this is that in a number of these markets, increased depth - an indisputably good thing for local originators and funding resilience - among other factors, has compressed yields to levels that are unattractive for foreign investors.
The multilaterals that have helped prop up these markets are taking note.
"There is a disconnect between the yields expected by foreign investors and what domestic deals will pay given local liquidity," said Daniela Carrera, head of the financial markets division of structured and corporate financing at the Inter-American Development Bank.
But the yields are still there for some, especially in markets like Brazil. Cutolo said his company's client base consists entirely of offshore investors. With $2 billion in its portfolios, the asset manager has a particular taste for agri-business deals in the structured realm. Another yieldy favorite of theirs, and by extension their foreign clients, are transactions backed by automatically deducted payroll loans, which some players in the market have criticized in part because of issuers' penchant for replacing troubled loans, making delinquencies difficult to gauge. Cutolo, however, sees value in them. "We currently have none in our portfolio, but we'd consider them," Cutolo said.
In Mexico, among investors, curtailing maturities is also the name of the game. "Investors want a shorter duration," said Ben Roger-Smith, director of structured finance in global capital financing at HSBC. Auto loans will be a good fit for some time. "It's an easier asset class for them to take to their credit committees," Roger-Smith added. HSBC recently closed Mexico's first pure auto loan ABS in the public market for GMAC Mexicana.
By the same token, trade receivable deals will come out as well, as they've proven their worth through the crisis, attendees said.
But extended maturities will be in demand again at some point, and government-related mortgage lenders Infonavit and Fovissste cannot pick up all of the slack on the longer end of the curve. "[Mortgages] are an asset that pension funds should be in, simply due to an affinity in time horizon," said Oscar Franco Lopez, president of the Association of Mexican Pension Fund Managers (AmAfore).
Covered bonds might also help (see p. 28).