First it was for Petrobras, now it's for Banco Itau - once again, Moody's Investors Service is center stage under the controversial spotlight for assigning a high rating to a transaction sporting political risk insurance.

Brazil-based Banco Itau is set to issue $300 million of subordinated notes through its Grand Cayman branch. Moody's has assigned an A3 rating to the notes as a result of the 18 months of political risk insurance provided by Sovereign Risk Insurance Ltd. According to sources at Moody's the rating is not only a result of the political risk insurance, but it also reflects the strength of the Brazilian bank, which currently has an A2 local currency issuer rating.

"Transfer and convertibility risk is mitigated by the political risk insurance and the rating represents what Moody's thinks of the strength of the bank," said a Moody's analyst. "It is unlikely that it will fail."

Additionally, Moody's believes there are strong structural and legal components that allow the notes to receive such a high rating. One banker looking at the deal agreed with Moody's. "That's an outstanding bank - the rating is appropriate."

Other market players were on the opposite side of the fence and felt the rating was too high. "[Moody's] seems to have quite high ratings on some of these deals and I'm not overly convinced of the huge value of the political risk insurance feature," said one investor.

The rating has also come at a time when the Latin American market is a bit dubious, and is therefore more susceptible to harsh criticisms. "I think it's just a tough time to bring a deal to the market with Argentina so unsettled," the investor said. "We're just not real crazy about jumping into the market right now, and all of the sudden they seem to be rushing this deal. I think if we end up participating in it we would have to not be rushed."

The deal may come to market as early as next week, although the investor warned, "If this deal gets done in short order it's probably because people are buying it because of the rating and not because they understand why."

The Baa1 rating Moody's assigned to the $450 million note issued by Brazil-based Petrobras International Finance Corp., which hit the market in May, also received some market criticisms (see ASR 5/14/01 p. 16). However, the deal, which also had political risk insurance, is now said to be performing quite well.

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