A few Mexican players have locked their sights on a virgin patch of ABS terrain, and, if they have their way, it'll be covered in trees within a few years. Structurer SAI Consultores has teamed up with placement agent Credit Suisse in a deal that combines some of the riskier elements of forestry securitization with the safety of local treasuries. Timber and cattle company Agropecuaria Santa Genoveva is originating the deal, currently sized at between Ps1.5 billion ($137 million) and Ps2.2 billion, and potentially due before year end, according to Gustavo Meillon, a senior associate at SAI.
The architecture of the transaction is fairly straightforward. A portion of the proceeds - probably somewhere near half - will go to buy a zero-coupon bond that ensures ABS investors will have their principal protected at the triple-A level on the national risk scales of the corresponding rating agencies. The remaining proceeds will go to purchase the land on which the collateralized trees will grow. A share of the sales of those trees will flow back to the bondholders.
The zero coupon bond minimizes the downside risk for investors, while the upside potential of flows from the timber sales could be significant, Meillon said. The structure was designed to appeal to pension funds, which generally only buy instruments on the high end of the ratings scale. In such a structure, "we'd only be rating the likelihood that the investors get their principal back," said Sam Fox, senior director at Fitch Ratings. That would ensure triple-A creditworthiness and open the door to pension fund money.
The final maturity of the transaction will likely be 17 years. The zero-coupon bond won't match the term of the ABS, as its only purpose is to ensure the eventual repayment of principal.
This style of deal has been attempted in Latin America before, but without success. During the summer of 2005, some leading Brazilian players were pulling together a transaction backed by a highly rated zero coupon bond and a basket of equities. Moody's Investors Service rated the senior piece of the deal Aa2.br' on the national scale. Analogous to the transaction being planned in Mexico, the equity portion backing the bond didn't have a bearing on the deal's rating.
The transaction was a receivable investment fund (FIDC) and had Oliveira Trust as the fund manager, Banco Itau as the master and backup servicer and Eccelera Administradora de Fundos managing the equity portfolio.
Expected to issue in early September 2005, the deal never arrived. Moody's withdrew its rating in March 2006.
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