Structured finance players in Latin America pushed through 2011 with few scars, especially given the turmoil pounding European markets.
This year should see sustained activity, provided the European crisis does not intensify and send everyone fleeing from all but the most ironclad investments. In terms of volumes, structured finance in Latin America tends to do best in a Goldilocks scenario of volatility. This holds particularly true for cross-border deals.
A Delicate Balance
"A little bit of turmoil tends to increase the demand for well-structured collateralized deals, but too much turmoil gums up the works," said Emil Arca, a partner at Hogan Lovells. Should the region hover in that sweet spot, a currently healthy pipeline will churn out a fair number of deals, he added.
Infrastructure is an area attracting a good deal of attention. In the past, many of these projects have been funded through loan syndication. But the large European banks have cut the purse strings as they look to boost their capital, and their U.S. counterparts are not picking up the slack, sources said.
"The infrastructure market is looking to capital markets, [so] there's a move toward securitization," said a market source, who added that that there has been a trend to craft deals in the mold of traditional ABS-style structures as opposed to project finance.
Whatever happens, Brazil will continue to absorb the lion's share of infrastructure investments next year. ABS players are likely to see more deals that are related in one way or another to Petroleo Brasileiro (Petrobras), which is plowing through a $225 billion investment plan. Emerging only 15 months ago, deals backed by drilling rigs chartered to Petrobras have totaled $2.5 billion, and players expect more this year. Other asset types connected to the company - such as floating production, storage, and offloading vessels - also have potential, said Fitch Ratings in its report, 2012 Outlook: Latin American Structured Finance.
Peru is also expected to generate infrastructure deals in 2012 backed by RPICAO notes, which are linked to irrevocable payments that the Peruvian government makes to a concessioned infrastructure project as it completes certain milestones. Water concession projects Taboada and Huascacocha have received funding through securitizing these sorts of payments. The government bankrolled $6.5 billion in projects via RPICAO issuance during the five years of Alan Garcia's administration, which ended in July. For 2012 alone, the new government of Ollanta Humala is anticipating a portfolio of RPICAOs valued at $10 billion, according to Fitch.
RPICAO assets are denominated in the local currency, new soles, which naturally make it more difficult to attract foreign investors.
Colombia may provide ABS opportunities as well, as president Juan Manuel Santos has been talking up an aggressive infrastructure investment plan, with at least half the funds coming from the private sector. A market source said that the Colombian government was looking to imitate Peru's PPP model, with the possibility that similar structured finance deals would materialize.
Meanwhile, the tried-and-true asset class of diversified payment rights (DPRs) could also produce deals this year, although they may be along the lines of the ones that came out last year, which were predominantly either private or multilateral-funded.
Within the domestic markets, Brazil should remain active. Agribusiness and trade receivables will provide fertile opportunities as they have in the past year, said Luciano Gurgel, vice president of capital markets at Santander Brasil.
Standard & Poor's Associate Director Leandro de Albuquerque said auto loans have proven a resilient business line for ABS players, while small and medium banks will continue to securitize payroll deductible loans, an asset class that has been a staple of the market for several years.
Apart from cross-border opportunities, infrastructure projects may find domestic ABS funding as well. Albuquerque cited a R$1.1 billion ($586 million) future-flow deal backed by water and sewage fees in Rio de Janeiro that was issued in 2011 as the kind of transaction that might be down the pike. Indeed, it is widely known that ahead of the 2016 Olympics and 2014 World Cup, Rio will need to channel heavy investment flows into infrastructure.
Albuquerque said the volume of securitizations that was rated by any of the agencies in 2011 totaled R$15 billion. This is a rough proxy for issuance and includes deals using the CRI vehicle for real estate assets and the FIDC vehicle for all other assets. S&P said issuance should grow 15%-20% in 2012.
In its report, Fitch warned that laxer lending standards during Brazil's ongoing consumer credit boom could pose challenges to performance. The agency also said that regulations governing risk retention and other practices, which are slated to come into effect January 2012, might nudge banks toward securitization. This is because the rules discourage loan portfolio sales on a recourse basis.
Mexico, on the other hand, is not going to quicken anyone's pulse next year. In its Latin America ABS & MBS 2012 Outlook Report, Moody's Investors Service said issuance outside the RMBS sector would be lackluster in the country.
And within RMBS, about 80% by volume will continue to be originated by one of two government-related originators: Fovissste and Infonavit. Banks are unlikely to produce more than the rare deal, and nonbank originators known as Sofols are completely out of the game.
Moody's has RMBS originated by the Sofols on negative outlook. The rating agency said it will be closely monitoring the sector next year to see if the already-significant delays in recoveries take longer than previously anticipated.
In Argentina, consumer assets and infrastructure projects will keep providing fodder for ABS deals. The latter sector has been receiving a powerful boost from an avid investor: the government's social security system, known as ANSES. The fund has wielded significant weight in the market since the government nationalized private pensions tin 2009. Nevertheless, the outlook for credit quality in consumer deals is negative, said Moody's in its outlook report.
One factor influencing the Argentine market is high inflation. The agency said that while increases in salaries have somewhat mitigated the impact of inflation on debtors' payment capacity, wages might not be able to keep up with rising prices in 2012. In that scenario, delinquencies are likely to go higher.
In addition, Moody's said that there is also the possibility that originators will act more aggressively to woo new clients or hold on to existing ones as they face competition from upstart rivals. At any rate, in general delinquencies are at historic lows in the sector.
Overall issuance volume should grow next year from 2011's rough estimate of Ps21 billion ($5 billion), according to Moody's. Infrastructure deals linked in one way or another to the government took up the lion's share in 2011 and will continue to do so in 2012.
One area that has drawn buzz over the past year is covered bonds. Mexico and Brazil, however, have yet to deliver on the promise that they hold in this sector and it is unclear that they will do so in 2012. There is, however, talk of a cross-border deal out of Central America.