There's a new faith in Brazil and it has nothing do with the annual Carnaval ritual that peaks next week. Receivables investment funds (FIDCs) are on the lips of every structured banker in Sao Paulo, though the volume of closed deals remains unimpressive. Converting more originators and investors will change that, or at least that's the gamble being made by bankers like Rodrigo Xavier, a partner at local bank Banco Pactual.

Xavier and his team are so confident in growing volumes that Pactual Asset Management plans to set up a mutual fund of FIDCs - in effect a fund of funds or quasi-CDO - in March. "The FIDC is a powerful instrument," Xavier said, citing the tax advantages and other features that have drawn at least 15 issuers to the vehicle already.

Other sources in Brazil were surprised that a conduit of this nature would be crafted with volumes as low as they are. "There's just not the raw material," said one analyst. "It's something for the future."

According to statistics from Fitch Atlantic Ratings, a total of R$1.8 billion (US$620 million) in FIDCs closed last year, and private placements accounted for a significant chunk of that. This year has gotten off to a slow start, which is not unusual, however, since January and February are summer months in Brazil.

But Pactual is not predicating its decision on past issuance. The fund has until the end of the year to pick up least five FIDCs, with no single fund accounting for more than 20% of the shares. The ceiling on the fund is R$500 million (US$172 million), and the bank has already received commitments from investors for R$100 million (US$34 million).

The fund will charge 40 basis points in fees on the amount invested, which should gradually increase as Pactual drops in more funds. Criteria for selection will be based on the structure of each fund. "We will be looking very closely at the credits, the triggers, and the filters," Xavier said. The maximum tenor of a fund will be three years and, as most of the funds that have closed so far have been close-ended, these will likely account for the lion's share of the mega-fund.

Only qualified investors will be eligible to buy in. Lacking the expertise themselves, pension funds and other institutional investors will be attracted to a vehicle that is willing to do the work for them. "Many of them don't have this dedicated area," Xavier said.

Other Brazilian players have said that steep yields on treasurys fed an indifference to other fixed-income instruments. The fact that FIDCs are fairly new makes educating investors all the more difficult.

Regular mutual funds that focus on retail will for the most part be disqualified from the Pactual fund, a situation that Xavier and other bankers are hoping will change, opening the door to a broader investor base in the FIDCs.

As the largest non-retail asset manager in Brazil, Pactual oversees R$22 billion (US$7.6 billion).

Last nail in Parmalat coffin

Elsewhere in the FIDC industry, Parmalat has finally bit the dust, for good. On Feb. 9, Banco Itau redeemed the single remaining share in a fund that had been on life support since Jan. 19, when the other eight investors bailed, according to a release by Standard & Poor's. The death of the fund has ironically served to invigorate the sector as a whole (see ASR 1/26, p. 22).

Itau, both bookrunner and the lead investor, chose to retain a sole share in the hopes of tapping other assets. Along with the fund's sponsor, Intrag DTVM, Itau apparently decided that the keeping the legal structure alive was futile. As in the rest of the world, a string of scandals has deeply eroded Parmalat's credibility in Brazil. Investors are loath to touch anything even remotely linked to the maligned milk producer.

Petroflex bounces back

Meanwhile, on a brighter note, an FIDC for Petroflex has so far issued R$59 million (US$20 million) of shares, nearly hitting the initial targeted amount of R$60 million (US$21 million), according to a source close the deal. Earlier, it was unclear whether the originator, a major petrochemicals company, wanted to hand over the volume of receivables needed to reach the projected size and retain a credit quality commensurate with the brAAA' given by S&P on the national scale. The targeted volume will now be achieved, the source said. Banco Votorantim is leading the deal (see ASR 12/15. p. 19).

http://www.asreport.com

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