With the run-up to October elections in Brazil wreaking havoc on the currency, interest rates and government bonds, the country's struggling securitization industry is hardly on the minds of most bankers or investors. Yet regulations introduced early this year have changed the rules of the asset-backed game and players are now taking notice.
"There are very esoteric assets being structured," said Sheila Gaul, executive director at local risk rating agency SR Rating. "I can assure you that in a few weeks we're going to have some interesting products."
Behind the buzz are receivables investment funds (FIDCs), a particular structure that has yet to see the light of day, but could define the landscape of local securitizations by mid next year, according to sources. Drawn to the FIDCs' tax incentives, structuring agents are dropping more traditional SPVs for the funds. Under a traditional securitization involving the true sale of assets, the SPV is hit with value-added taxes on top of a marginal income tax and financial transaction tax CPMF. Treated like conventional investment funds, FIDCs are exempt from CPMF and, depending on whether the fund is open or close-ended, income taxes tend to be lighter as well.
"My perception is that we are going to have a boom in this kind of structure," said Patricia Bentes, managing director of Hampton Solfise. Her consulting firm is preparing a US$36.4 million-equivalent consumer-loan backed FIDC that could be the first to hit the market later this year (see ASR 9/23, p. 19).
"We are looking very closely at this one and are going to follow the distribution of quotas," said one Sao Paulo-based banker, who has been active in securitizations, but is staying off the FIDCs for now.
The funds act as a bankruptcy remote entity in buying ownership rights to securitized assets under a true sale by an originator, using the proceeds from the sale of senior and subordinate shares in the fund. Open-end funds provide investors with a put on their shares before amortization; closed-end funds require they maintain shares outstanding until maturity.
"These funds are becoming an important tool for the financial sector to get rid of some difficult assets in their portfolio," Gaul said. SR Rating is looking at several closed-end funds that will sell zero-coupon shares. "They will offer a big discount," she added.
Apart from consumer loans, structuring entities are eyeing banks' corporate loans, utilities' receivables, auto loans, and possibly credit-card receivables, sources say. Other more obscure segments are also attracting attention.
Yet hurdles still loom large for securitizations overall. With the exception of treasuries, issuance throughout the local markets has screeched to a virtual halt ahead of the Oct. 6 elections and the potential for a run-off on Oct. 21 could prolong the dry season. At this point, a victory for Jose Inacio Lula da Silva looks like a foregone conclusion. Though he's traded fiery leftist rhetoric for a more button-down style, interest rates and the currency are spinning out of control.
Should the leap in interest rates and the dollar hold, some argue that local investors will stick to the safety plays. "If Lula wins, we could be waiting a while for a new deal to come to the market," said the Sao Paulo-based banker. But with Brazilian treasuries now seen as an increasingly risky bet, others think the appetite for structured deals will only grow. When the flight to safety is just as turbulent as sticking with spread products, "why make the trip?", they ask.
Yet, with or without Lula, investors are wary of structured deals. "They still don't know the product," said the Sao-Paulo-based banker. "There's still not the culture to invest in securitizations."
In addition, trading in local securitizations is nonexistent. "The market hasn't taken off on the local front," said Jayme Bartling, senior analyst at Fitch Brazil. Securitizations suffer from the same fate as virtually all other non-government paper: crowding out from treasuries.
What is more, there is an arguably valid debate over whether SPVs are ever truly bankruptcy remote. "You talk to some lawyers and they'll tell you that you can never get the true sale here," said one source familiar with securitizations in Brazil. But though Gaul concedes that they can be risky investments, she says the segregation structures in many deals have been ironclad. This, she says, will hold true for the upcoming FIDCs.
One potential boon to local securitizations is the stomach-churning volatility in the exchange rate. That, along with foreign investors who want nothing to do with Brazilian names, is keeping issuers at home. "The outlook for dollar funding isn't very good," Bentes said. "From an issuer's standpoint, it's better to borrow in reais."
It is true that more familiar Brazilian entities have squeezed some securitized deals through the cross-border window. Well-regarded financial institutions such as Banco Itau and Banco do Brasil have been the most successful since election polls began stoking volatility several months ago. Two weeks ago, Banco do Brasil priced a US$40 million bond backed by electronic money transers, known as MT100s, at 7.89% via ING Financial Markets. Still, even Banco do Brasil bowed to the market's whims. While previous deals went public, this one was a low-key private placement.
One transaction in the bone-dry cross-border pipeline is a US$500-million securitization of credit card receivables generated by Visanet. Merrill Lynch is arranging that deal, which, sources say, will not emerge without a wrap. And, as usual under conditions of extreme exchange-rate duress, export-backed deals are not out of the question. "The rule is exporters are usually the last to get the door slammed," Bartling said.
Meanwhile, domestically, the FIDCs are not the only securitization sector with a story to tell. The staid real-estate related market is evolving as well, sources say. Dominated by securitization companies that also benefit from a CPMF exemption, the MBS market suffers from the same problem as other securitization sectors: lack of liquidity. MBS are typically structured as CRIs or mortgage-backed certificates. Outstanding CRIs reached R$340 million (US$90.4 million) at the end of 2001, according to Fitch.
On the more voluminous front of real-estate receivable deals, Banco BBA Credinstalt closed a transaction in early September (see ASR 9/16, p. 23). To date, deals backed by real-estate receivables have reached R$1.4 billion (US$372 million). But as in other securitization types, a secondary market remains elusive. - FO