Almost a year after it launched its political insurance product for the capital markets, the Overseas Private Investment Corp. made its Latin American ABS debut.
Two Argentinean issuers, Edenor S.A. and Transportadora de Gas del Norte (TGN), were the first to make use of OPIC's transfer and convertibility insurance (TOC).
"The reason why it took some time to see OPIC-backed deals is market volatility," said Jorge Solari, analyst with Standard & Poor's in Buenos Aires. "Windows of opportunity for issuers have been few and far between and whenever things were opening up and looking better issuers felt that they didn't need OPIC to access the market. At the same time, when market conditions weren't good issuers preferred not to launch deals at all. OPIC insurance was an alternative only when the situation was somewhere in between good and bad, when investors were willing to buy Argentine debt but only with this type of enhancement."
Edenor, Argentina's largest electrical distributor, sold $140 million in notes secured by a debt obligation from the company to local banks in Argentina. The notes were issued through the GAIN Financial Trust and received a BBB-plus rating from Fitch and a BBB-minus from S&P. The pricing for the paper was of 200 basis points over Libor. Citicorp Capital Markets was the arranger.
For this deal, OPIC's policy insures the payment of principal for the $140 million in bonds, but not the interest payments. In addition, the issuer did not set up a reserve fund. This means that in the event of a transfer and convertibility problem Edenor may not be able to keep up with payments while OPIC processes the claim.
Some sources were surprised that Fitch would rate the deal at Edenor's local currency rating of BBB-plus. "I think that the rating is much too high for a transaction that doesn't insure interest payments or timeliness of payments," said a source in the local market. "It seems to me that they adapted the BBB-plus rating to the needs of the issuer."
The second deal to be backed by OPIC's insurance will be a cross-border securitization lead by Merrill Lynch for gas distributor TGN. The transaction, which is expected in the market this month, will feature up to $200 million in notes and was also rated BBB-minus by S&P and BBB-plus by Fitch. In this case, OPIC will insure the payment of principal and interest for 50% of the issuance. TGN's transaction also features a six-month reserve fund to protect the timeliness of payments.
Though there are other insurers offering TOC coverage in the market, pros working on the TGN deal felt that OPIC was the best option. "OPIC was selected due to their claims payment track record and their backing by the government of the United States, which is viewed more favorably by investors than commercial providers of political risk insurance products," said Claire Coustar, vice president in Merrill's Latin America structured finance group.
OPIC's insurance product generated widespread interest among investors and issuers alike when it was first launched last summer. Several Latin issuers such as Aguas Argentinas, YPF and Telefonica del Peru saw it as a way to pierce the sovereign ceiling and widen their investor base. Yet none of them closed an OPIC-backed deal.
"In the case of TDP [which Merrill advised] I think that investors valued the product in relation to where the sovereign was trading," said Coustar. "However, the company had other commitments from local lenders and investors at similar pricing levels and tenor to what they were seeing in the U.S. market without having to take on the currency risk of issuing in dollars."
However, some investors maintain that they were not convinced by OPIC's product. " TOC insurance is nice and good but I'm not sure how much credit or real value you can give to it," said an investor. "I was not convinced that it was worth the extra money and I also felt that the policy had too many bells and whistles."
This time around things seem to be different. "Bankers and rating agencies put in a lot of hard work in educating investors about OPIC's insurance policy," said a banker. "And I believe that investors feel much more comfortable with the product now."
Some of the "bells and whistles" that turned off some investors are also gone. "For the TGN deal we did things differently than for TDP, we got rid of a lot of OPIC-imposed restrictions in an attempt to enhance liquidity for the transaction and benefit investors," said Coustar.
By statute, OPIC can only support investments in which U.S. citizens or U.S. entities have a majority stake. Consequently, OPIC officials were concerned with what would happen to the bonds in the secondary market. "OPIC had a tremendous amount of mechanics to monitor secondary trading in order to ensure that the notes would not go to non-U.S. accounts," explained Coustar.
"For the TGN transaction we took some of those monitoring elements out and placed a 40-day seasoning period instead. That means that any secondary sales during the first 40 days have to be made to U.S. investors and that after that the bonds are free to trade between investors in the Reg S tranche and investors in the 144A tranche."
Others are expected to follow in Edenor's and TGN's footsteps. "I believe that these two deals could be a good incentive for other companies," said Solari. "In that sense, OPIC's product is good news because it will enable a variety of issuers to access the markets at a reasonable price. On the other hand, investors could start requiring this type of coverage and therefore "punishing" those issuers who don't feature it."