Morgan Stanley Dean Witter recently completed a $101 structured note transaction for Argentine energy conglomerate Perez Companc. The transaction was structured to allow Perez to purchase Entergy International Ltd.'s 5% stake in electricity distributor Edesur S.A. and was backed by Perez's own promissory notes to Entergy.
The deal, which made use of Morgan Stanley's LS Program and was called LS Trust Series 1999-1, was issued through a trust managed by HSBC Bank Argentina, and sold to domestic investors in Argentina. The structured notes have a three-year maturity and pay a 7% coupon, which matches the terms of the underlying promissory notes. The deal received a triple-A rating from Standard & Poor's.
Though synthetic-type deals are not unusual in Argentina, this is the first time that structured finance has been used in the is way. "Perez Companc benefited from the fact that it could issue payment through promissory notes instead of cash," said a source close to the transaction. "In addition, the company was able to further reduce the costs of issuance by using an outstanding program created by Morgan Stanley."
According to Juan Pablo de Mollein, analyst with Standard & Poor's, the transaction's success was due to the familiarity of the local market with synthetic securitizations and the important tax brakes associated with the deal's structure.
As a result of tax reforms enacted in 1998, note holders in Argentina are subjected to a 33% to 35% revenue tax on the interest payments they receive from issuers. Interest payments from trust funds, however, are exempted from this tax, which makes the structure less costly for the issuer and more attractive to potential buyers.
"The structure was straightforward, but the purpose of the deal was innovative" said de Mollein. "If investment banks such as Morgan Stanley are aggressive enough in the marketing of structures such as the LS Program, we might see other companies doing similar deals in the future." TH