Though it has long been a model of economic growth and stability, Chile has been slow to approach the securitization market. But that may be set to change thanks to a recent liberalization of the previously highly restrictive 1994 securities law (Law 18.045).
Until the recent amendments, which were passed by Chile's Congress in mid-August, the law limited securitizable assets to those with "title" interpreted to include only mortgages and mortgage bonds, according to sources in Santiago and New York. After the amendments it is now possible to securitize credit cards, telecommunications receivables, leases, car loans and infrastructure concessions.
"We are very excited about the new law and its potential influence on the ABS market," said Jorge Chang, an analyst with Duff & Phelps in Santiago. "What is needed now is a campaign aimed at familiarizing all sectors of the market with the nature and advantages of securitization as a financial tool."
The amendments also ease several administrative procedures and restrictions in order to reduce costs and foster market development. Prior to the amendments, for instance, securitization vehicles had to purchase the entire portfolio of underlying assets before issuing notes, making deals very costly. Now securitization vehicles are allowed to issue notes before the acquisition of the underlying assets is finalized.
The old law also insisted that a bank could contribute no more than 50% of the assets in a transaction, while, in cases in which the issuing bank is related to the securitization company, the level of contribution could not exceed 15%.
The 50% contribution limit on banks is now eliminated, though the 15% contribution limit on banks that use related securitization companies still stands. Though the later limitation may raise the cost of securitization for banks, it could also give rise to a service industry that will provide independent special purpose vehicles.
The current economic situation of A-minus-rated Chile is also expected to be favorable for the asset-backed market. Interest rates fell considerably over the last year and the country seems to have successfully averted its economic problems. "Chile has experienced a big improvement during the second half of 1999," said Andreas Bauer, representative of the Chilean Ministry of Finance in New York. "The macroeconomic conditions for securitizations are ripe."
Domestic deals backed by future flows from infrastructure projects, residential leasing and credit cards are widely expected. "I see a lot of potential in the local market, there is a developed pension fund market and a strong pool of local investors," said Antonio Villa, analyst with JP Morgan in New York.
But whether the new law will help launch international securitizations remains a subject for discussion. "Large and important sectors of the Chilean economy are export-oriented, so I believe that we will be seeing quite a few international securitizations," explained Alvaro Clarke, the official in the Chilean Housing Ministry who worked on the legal amendments. According to Antonio Villa, however, the fact that most of Chile's big exporting companies are investment grade makes them less likely to approach the securitization market.
"The new law laid the ground for Chile's ABS market. The ball is now in the issuers' court," added Chang.