Though Overseas Private Investment Corp.'s (OPIC) new political risk insurance has its first Latin American deal in the market and several other transactions in the pipeline, investors and ratings agencies continue to debate its merits, and differ over whether it will have enough momentum to stymie asset-backed issuance, as some have predicted.
Designed to protect emerging market transactions against the risks of transfer and convertibility (ASR 8/9/99), political insurance such as OPIC's is seen by many as an effective way to pierce the sovereign ceiling. So much so, that many companies are now pitching deals to investors without an asset-backed component, relying solely on insurance provided by OPIC or Zurich U.S. Political Risk.
Mexican brewer Femsa Cerveza, is one such company. After talking to prospective investors, the company decided to launch a $200 million deal insured by Zurich. "The company was aware that spreads would be wider with this type of structure," said a source close to the transaction. "But they decided to pay the price and save their export receivables for a rainy day.'"
Telefonica del Peru, which successfully closed a $180 million securitization of future telephone settlements in the last quarter of 1998, also opted for a corporate issuance using OPIC political insurance. The company is in the market with a $200 million transaction managed by J.P. Morgan & Co. and Merrill Lynch & Co., marking OPIC's debut in the Latin arena.
Aguas Argentinas, Brazil's telecommunications company Tele Centro Sul, Electricidad de Caracas and YPF are scheduled to launch their OPIC-backed transactions in the near future.
But as transfer and convertibility risk insurance gains popularity among issuers, the market is debating its strengths and weaknesses.
Among rating agencies, there are differing views on the significance of the political risks not covered by OPIC and Zurich's policies.
Sources at Fitch IBCA explained that their basic rating assumption is that the local currency rating of the corporate can exceed the local currency rating of the sovereign based on the ability of the corporate entity to meet its financial obligations. Applied to OPIC-backed deals, that assumption means that the ratings should be directly linked to the rating of the corporate.
But, while the rating of an OPIC deal can never be higher than the capacity of the company to pay its debt, Fitch sees no theoretical or historical reason to limit the rating of an OPIC deal to that of the local currency of the sovereign.
Other agencies disagreed with this rating rationale.
"The insurance policies offered by OPIC and Zurich only insure transfer and convertibility risks, ," said Daniel Bond, vice president of Duff & Phelps Credit Rating Co.'s sovereign group and the rating agency's chief economist. "There are many other significant political risks, such as currency devaluation, expropriation and political violence, that should not be overlooked." These concerns lay behind Duff & Phelps conservative stand regarding some of the OPIC transactions.
Some investors though, have deemed the ratings for the deals "pretty aggressive."
"I don't think that the deals are going to price in the triple-B range," said an investor who passed on the deals. "I think they will end up widening the spreads to be able to sell that structure."
Others expressed some reservations regarding political insurance-backed transactions.
"OPIC insurance doesn't do a whole lot for me," said Paul Aronson, vice president at Lincoln Investment Management.
"I think securitizations are much better structures for several reasons: they involve companies with dollar revenue sources, it is extremely unlikely that a sovereign entity will interfere with the company's export related businesses and, finally, because an export receivable transaction is structurally senior to a debt investment."
Despite some investors' preference for asset-backed deals, bankers regard political insurance as a good alternative to securitization for certain companies.
"OPIC's inconvertibility insurance is useful for companies which have no more assets to securitize. It also offers clear advantages for companies that are domestic-based and have good credit records on their own right but are hampered by the sovereign," said Claire Coustar from Merrill Lynch's Latin America structured finance group.
"Although OPIC deals are blanketing the market right now, we will continue to see traditional export securitizations."
Still, the advantages of political insurance seem to be more appealing to issuers than to investors. "I would prefer to do deals without any kind of insurance," said a source. "I believe that we are giving up too much spread for an insurance policy that may or may not be worth very much."
"If a company is fundamentally strong enough to do a deal, I see no reason why I should buy an insurance policy," the source said. "If it needs the insurance to get the deal done, I doubt that I really want to waste my exposure on that type of credit."