Despite the pre-election uncertainties that are slowing the Argentinean market, Wasserstein Perella and Bear Stearns recently closed a $91.3 million securitization of co-participation of tax receivables for the province of Santiago del Estero.

The transaction is the latest tranche in the province's $120 million securitization program under which 10% of Santiago del Estero's co-participation tax revenues due from the federal government have been assigned to a trust.

"We expected to issue $50 million of notes and ended up offering over $90 million," said an official at Bear Stearns. "I believe that investors liked the deal's strong structure and the financial solidity of the province."

Indeed, even though Santiago del Estero is one of Argentina's poorest provinces, it has recovered financially since the central government was forced to intervene in 1993. Today, it is one of the few Argentine provinces that enjoy a fiscal surplus and a manageable debt.

The notes, which have a seven-year final maturity and bear a 15.875% coupon, were placed with local and international investors. Duff & Phelps (DCR) gave the transaction a double-B-minus international rating and both DCR and Magister Thomson Bankwatch awarded it a double-A-plus local rating, the highest rating ever achieved by this type of transaction.

Fueled by high interest rates on bank loans and the need to refinance existing debt, Argentine provinces have increasingly opted to access the capital markets.

In 1996, the province of Mendoza launched a groundbreaking 144A-type securitization of oil and gas royalties. A year later, the province of Tucuman closed the first international securitization of co-participation tax revenues.

"The Argentine provincial bond market is becoming one of the most active municipal bond markets in the world," said Gersan Zurita, head of Public Finance at DCR.

The trend is rooted in the hyperinflation and financial mismanagement that plagued Argentina's economy until 1991. During those years, the provinces borrowed heavily in order to meet their capital expenditures needs.

When the time came to restructure those debts, the provincial governments faced a double challenge: the costs of straight bank loans were restrictively high and the market was unreceptive to long term paper. In addition, local banks that had constituted the main lending base for the provinces over the years were seeking to reduce their involvement.

A great deal

"These transactions are guaranteed by federal tax payments, which means pure sovereign risk. Therefore, lending to the provinces is a great deal," explained public finance expert Pablo Batalla, who works for Buenos Aires' city government's Secretary of Finance.

However, for some, the co-participation agreement between the federal government and the provinces is a double-edged sword. A number of analysts view the amount of future co-participation tax revenues tied-up in securitizations deals, which in the case of the provinces of Tucuman and Rio Negro comes to up to 90%, with growing concern.

"The fact that the provinces are issuing paper backed by the Argentine government is very dangerous," said a source. "It means that in the event of a default the federal government will be automatically affected."

Others feel that this view is a bit on the panicky side. "There is no doubt that many provinces are very much in debt, and some are running into some trouble" explained DCR's Zurita. "Still, many are not having any problems with their loan payments. They should be analyzed on an individual basis."

Controversies aside, no similar deals are expected in the market before the October presidential elections. "I believe that Bear Stearns would be interested in bringing other provinces to the market in the future," the Bear Stearns official said. "In the short term, however, the macroeconomic uncertainties related to the elections would hold back international investors. We will have to wait and see."

Unibanco raises cash for Trikem

Elsewhere, Brazilian bank Unibanco recently closed a R$50 million securitization of receivables from commercial contracts for Trikem, the petrochemical arm of the Odebrecht group.

The notes will be issued out of the TRK Trust special purpose company and will have a three-year maturity, and an average life of 18 months. The paper has a 19% coupon and was placed with local insurance companies. "I think that the market felt very comfortable with the receivables," said Ney Silva, Director of Finance at Trikem. "It was a relatively cheap operation and we were very pleased with Unibanco."

This is not Trikem's first asset backed deal. Back in 1997, the company tapped international investors with a securitization of export receivables arranged by Goldman Sachs and, according to Silva, another securitization of export receivables is expected to hit the international capital markets before year-end.

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