The focus of more than few cross-border players in emerging market structured finance made a hemispheric shift in the latter half of 2004 from Latin America to Russia and the Middle East, namely Turkey. It wasn't that Latin American activity had petered out. Brazil, for instance, produced a few respectable transactions. It was simply that the largest, most headline-grabbing deals were all flowing from the other side of the globe and the Latin American product making the rounds in the cross-border arena
didn't offer much novelty in terms asset class or structure.
With some nuances, that tone seems likely to hold next year. Russia's entry into the structured arena with Gazprom's secured export notes for $1.25 billion will likely be followed by more export and financial future flow deals, sources said.
"We certainly see interest from Russian originators," said Benedicte Pfister, managing director at Moody's Investors Service, referring not only to future flows but also consumer loans and RMBS.
The latter two asset classes, however, still face obstacles, primarily legal in nature. In the case of mortgages, relevant laws are being revised with a strong government push to encourage securitization, sources said. Consumer assets, on the other hand, are up against two tough hurdles. One, affecting all onshore assets, stems from the barriers in setting up a bankruptcy-remote SPV. The other, particular to this asset class, is rooted in secrecy laws that stand in the way of disclosing information about debtors. "And I don't think there are any legislative initiatives [to fix this]" said one well placed source.
Yet for its sheer volume, consumer assets are tough to dismiss. Personal loans in the Russian banking system, for instance, have boomed to Rbs517 billion ($18.4 billion) as of Sept. 30, from Rbs45 billion at the end of 2000. That total includes loans denominated in both rubles and dollars.
Projecting heavy growth next year, one London-based banker said he and his peers have already been jockeying for business. "There'll be bigger interplay between relationships that banks have with clients and securitizations opportunities," he said. "Those that have provided non-structured services will be leveraging up to get the deals."
In Turkey, exporters are unlikely to come to market, with "originator" remaining synonymous with "bank." The top-tier institutions now able to clinch an investment-grade rating from Standard & Poor's - the first such public deal was a $600 million DPR-backed transaction from Isbank in November - will continue drawing mono-line companies. The volumes next year, especially in the first half, might die down a bit from the unprecedented bulk of the last couple of months. "The Turkish market is fairly rich right now," said one well placed source. "We've seen some originators postponing deals because of the cash [on hand]."
While diversified payment rights will remain the collateral of choice, existing assets like equipment leases and auto loans might also come into play, according to Gary Kochubka, director at S&P. "You'd need some form of currency transfer and convertibility structures to get above the sovereign rating," he said. S&P has the Republic of Turkey's foreign currency rating at BB-'. Fitch Ratings and Moody's rate the sovereign B+' and B1', respectively.
One appealing prospect for bankers next year is the emergence of Egypt, with two future flow deals in the works. One from state-owned Egyptian General Petroleum Corp. is sized at $1 billion and will likely look like the energy receivables deals that have come out of Latin America. With BNP Paribas, Merrill Lynch and Morgan Stanley as joint book runners and Morgan as global coordinator, that transaction could see the light of day in 2005, according to sources. Another Egyptian deal that has been much longer in coming, originated by National Bank of Egypt, might come out as well, though it is unclear whether the tax issues holding it up will be resolved.
Nearby, the Maghreb region, comprised of Morocco, Algeria and Tunisia, is not expected to create much of a stir on the cross-border front. "Doing cross-border transactions seems more difficult in the Maghreb given [the] lower volumes and less appetite for such type of structured deals," said Mehdi Ababou, an analyst at Moody's.
So far, Morocco has produced domestic RMBS for a total of Dh1.25 billion ($149 million). Amendments to a securitization law, needed to bring new assets on stream, is currently in the works, according to Ababou.
In another area of the Eastern Hemisphere that is somewhat peripheral to securitization bankers, an RMBS that recently closed out of the Baltics, is not expected to be repeated in the medium term. Eventually there will be more deals, but probably not next year, a source said.
Meanwhile, in Latin America, Brazilian exporters are unlikely to produce a sizable volume of securitization issuance, in a reprise of activity in 2004. "Commodity prices are still quite high," said one source seasoned in the debt dynamics of the region. "That's going to keep exporters away."
While more financial future flows are expected from Brazil - there's been a buzz for some time of a DPR debut from HSBC - Central America is poised to grab the attention of players as well. "We're likely to see some diversification coming out of the region," said S&P's Kochubka. Apart from the usual suspects such as El Salvador, Guatemala is reportedly eying the market in what would be a debut transaction.
Until quite recently the bane of the cross-border Latin American market thanks to fallout from Argentina's debt default, existing assets are likely to come back as well. The transaction that's garnered much of the buzz, a $100 million from Metrofinanciera via Dresdner Kleinwort Wasserstein, appears to be proceeding at a glacial pace, something to be expected from a deal that would be the first Mexican real estate receivable transaction abroad.
"I think we'll see the first cross-border [real estate] deals out of Mexico next year," said Diana Adams, managing director at Ambac. While the first deal comes unwrapped - but with a swap from Dresdner - other transactions in the future might attract the monolines, according to Adams.
Mexican domestic front
The domestic market in Mexico will continue thriving next year, feeding on a variety of assets from real estate companies, toll-road operators, sub-sovereigns and consumer finance agencies, among other originators. "Things should go well and I think we'll see more complex structures," said Rogelio Arguelles, a director at Fitch in Monterrey.
If next year doesn't endure a market shock like the one that hit in the second quarter of 2004 - when interest-rate volatility paralyzed issuance for three months - overall volumes could be higher, according to sources. But another question mark also hangs over the securitization business. M&A activity in the real estate business might diminish the need for securitization, as Sofols - construction loan and mortgage originators - are snapped up by higher rated international banks that can provide relatively cheap funding.
That has already happened with the largest mortgage Sofol. Hipotecaria Nacional cancelled a domestic RMBS led by Citigroup Global Markets, after Spain's Banco Bilbao Vizcaya Argentaria purchased the originator. Now it seems that fellow heavy hitter Credit y Casa will follow suit, as Scotiabank has announced plans to purchase up to 80% of the Sofol. The Canadian bank's intention has already led Moody's de Mexico to put the originator's national scale rating of Baa2.mx' on watch for an upgrade.
But other developments might offset the dampening effects of a short- to medium-term removal of larger Sofols from the marketplace. "There's still going to be the medium and smaller Sofols that have securitization has an ideal way to grow," said Jose Landa, the head of the Mexican association of Sofols, know as AMSFOL. He added that the creation of RMBS conduits - already done by General Motors Acceptance Corp. in Mexico - will boost opportunities for purchasing pools from smaller Sofols and securitizing them. In addition, Landa noted that the M&A activity demonstrates that foreign investors are willing to bet on Mexico's mortgage growth, which can draw the attention of global players to the securitization business as well.
In addition, there is always Infonavit, a government agency that has a Ps4 billion ($355 million) shelf it plans to complete by mid-2005. So far, it has issued roughly Ps1.2 billion off that program.
In Latin America's other large domestic market, Brazil, activity will remain focused on receivables investment funds (FIDCs), which this year were used to securitize personal and consumer loans and trade receivables, among other assets. "FIDC volumes increased 40% in 2003," said Juan Pablo de Mollein, director at S&P. "We expect growth to be the same or higher next year."
"There are a lot of transactions in the works that are bigger than what we've seen," said Patricia Bentes, managing director at Hampton Solfise. Among newer asset classes under consideration are future-flow deals and other transactions for large projects.
Hampton itself plans to create opportunities for new assets with a multi seller conduit FIDC for about R$1 billion ($360 million). Leading the crowd in size, retail giant Casas Bahia is reportedly coming down the pike with a R$700 million deal via Banco do Brasil, while the Cataguazes group - comprised of five electricity distributors - has a R$240 million fund in the works.
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