A Brazilian regulation that goes into effect today ratchets up the default probability of mezzanine tranches in domestic ABS, said Moody’s Investors Service in a release.

The rule discourages issuers from supporting their receivable investment funds (FIDCs) through asset buybacks and substitutions. FIDCs are the most popular vehicle for securitization in Brazil.

The new rule says that transaction support would force issuers to consolidate transactions classified as risk retention onto their balance sheets.

“Existing mezzanine tranches to date have performed well,” the agency said. “The next generation of mezzanines, however, will perform in line with the ratings assigned to them as sponsor support ceases.”

More details can be found in the attached report.

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