Recognizing that traditional financing techniques are not enough to propel their capital markets forward, representatives from Peru, Chile, Colombia, Bolivia and Ecuador gathered last month in Lima, Peru for a securitization conference.
Throughout the event, representatives from the banking sector, the corporate side and the regulatory authorities discussed the potential and the challenges of securitization in the Andean region.
"Securitization is not only an excellent alternative way to obtain long-term financing," said Enrique Diaz Ortega, president of Conasev, Peru's national securities commission. "It is also a way to achieve the macroeconomic objectives of our economies and a way to make us more competitive in the global economy."
Despite its merits, securitization is still a work in process in the area. "There is a very big interest in the region in developing this technique, and most countries have come a long way," explained Pilar Galvis, from Galvis & Associates, an ABS consultantcy from Colombia. "However, securitization hasn't yet emerged as a major force or a true alternative to more traditional forms of financing."
Deficiencies in the legal framework, tax burdens and stringent rating standards were identified as the main hurdles on the road to Andean securitizations. "Our countries have been working on the legal framework for securitization for over 10 years," said Galvis. "I believe that we should stop now before we begin to over-regulate the sector and obstruct its development. We should let the markets act by themselves and see what happens."
Other participants agreed and expressed concern that the laws had too many "bells and whistles". However, they were also cautious about adopting the U.S. legal framework for securitization as a role model.
"We shouldn't be too hasty in imitating the American techniques and legislation," said Alberto Carrera, vice president at Citibank Capital Markets in Peru. "Their securitization system is hugely successful but it doesn't mean that if we adopt it we'll automatically be as successful as they are. If we want securitization to succeed in our area, we should be mindful of our own culture and way of doing things."
Another important issue raised during the meetings was the need to adapt rating agency standards to the realities of issuers from the Andean region. "On the one hand, the international standards used by some of the agencies don't accurately reflect the risks involved in some of the transactions of this area; what would be considered risky in a U.S. transaction, for example, might be regarded as moderate risk in our domestic markets," said Gonzalo Ortiz de Zevallos, corporate finance associate at Arthur Andersen.
"On the other hand, we don't want the agencies to be lenient because an over-rated deal that ends up performing poorly would erode investors' confidence and be completely counter productive for our market."
Looking forward, MBS was singled out as the main future source of securitizations. "Our area has a huge housing deficit and securitization is the best and only way for us to issue mortgages," said Jose Esposito, vice president at Banco del Credito del Peru. "In the case of Peru, the economy is volatile and our mortgages have a limited track record. As a result, in the near future we will only be able to issue small deals with high levels of overcollateralization and relatively short maturities. But you have to start somewhere."