It has often been said that the legal systems in Latin America have hindered the development of a securitization market. That opinion, however, seems to be changing in various pockets south of the border, sources say.
"Three or four years ago I would have said that legal infrastructure was a significant impediment to securitization in Latin America," said Jeffrey Stern with Thacher Proffitt & Wood. "I think it's less so now because there has been a broader recognition among Latin American countries that getting their legal infrastructure in order is the price of admission to these markets, and consequently this revision process has been taking place in countries across the region for several years."
Latin American securitizations are usually quite intriguing, as they are often creatively structured around legal frameworks that are not exactly conducive to securitization transactions. And, while it might be easy to suggest that the laws simply be changed, it certainly is not as easy to accomplish. To tackle the matter, the financial infrastructure must be in place, and some countries have recently made great strides in that regard, sources said.
"In some of the more cutting-edge areas, such as credit derivatives, I think the Latin American markets are just beginning to take up the legal and regulatory issues relating to these products," Stern said.
It is important to note that many of the legal changes made within the legal infrastructures in Latin American countries do not necessarily make the framework more conducive to cross border transactions. "Most of the changes that have been made will promote the local market, which is good, but they are not conducive to cross border deals," said Doug Doetsch of Mayer Brown Rowe & Maw.
There are many deals in the region that do not feature off shore special purpose vehicles and therefore those deals are exposed to sovereign risk. "For non-investment grade countries I don't think investors want assets to be owned by the country," Doetsch said. "Argentina highlights the fact that if you have assets owned by the country, they are subject to the local laws and there is nothing you can do about it."
However, there are many deals that do in fact feature SPVs located in a "tax haven jurisdiction" - like Cayman or Bermuda. "Cross border deals that are done in a tax haven jurisdiction should be subject to a lower withholding tax," Doetsch said. If those deals are not provided with a lower withholding tax, it can be quite expensive for the company. "Most securitization in Latin America has been cross border and it is good that they are promoting the secondary market," Doetch said.
Perhaps the country in the region that has made the most significant legal strides is Mexico. "Mexico has been moving very quickly to update its legal infrastructure - to refine it - so that it is securitization- friendly," Stern said. "I think you are going to see, this year or possibly next year a significant up-tick in Mexican securitization, fueled in equal parts by the developments in law, the stability of the Mexican peso, which allows issuers to swap from peso to dollars more cost effectively (because there is less devaluation risk), and the overall strength of Mexico, which is now investment grade."
In the past year, Mexico has adopted new pieces of legislation that have helped to create a more sound legal infrastructure. These include the new bankruptcy law, the eased pension fund systems, and the security interest law. Prior to the change in the pension fund system, the government only allowed investors to invest in double-A rated assets or better, and that could only account for up to 35% of the portfolio. The revised guidelines do not set allocation restrictions for triple-A rated securities, which include corporate and asset-backed bonds (see ASR 3/18/02 p.1). The security interest law has also made it less cumbersome for securitization transactions in Mexico.
Although, quite typical of the way things work in Latin America, two steps forward usually come with one step back - the tax laws that were passed late last year have created some difficulty with securitizations, though sources say they are being ironed out.
Following suit, Venezuela and Peru are also said to be actively restructuring their legal framework sto make laws more securitization friendly having seen the benefits of securitizations in neighboring countries.
Last year marked the second largest year of securitization for Latin America, with nearly half of the volume emerging from Brazil. As one of the most active securitization markets in the region, Brazil seems to have laws that are relatively conducive to securitizations; according to one market source, in some cases the laws have been tested in the courts and they have held up. Going forward, Brazil is once again slated to be a top issuer south of the border.
Argentina, clouded with political and economic turmoil, is said to have a legal framework that is the most conducive to securitization markets. Unfortunately, while this country used to be the most popular securitizer, it has certainly fallen from grace. It will be a few years before securitization deals start hitting the market again - "Our grandchildren will be securitizing there," joked one market participant.
Among the different countries that have come to market in recent times, including El Salvador, Panama and Beliz, the legal framework is said to be "doable" for securitization, and any complications to be had in those areas may not be a result of legal issues.
Sources say that going forward, the market will continue to see some securitization action from some less likely Latin American countries as well as some from the Caribbean markets. "In the Caribbean, it is easier to make amendments to the laws and the practices, and the deals are smaller so there is not too much risk," said one market participant.
Additionally, private placement transactions seem to have a growing popularity in Latin America, especially in Mexico. "Private placements are not only a growing trend, but are in fact a market on which our regulators are actually working in order to set up a regulatory framework that accurately determines the kind of role the authorities will play in these transactions," said Boris Otto, the head of Thacher's Mexico City office.
"In general, our experience has been that Latin American securitization issuances, to the extent that there is a local component to it, it tends to be in the form of registered offerings. To the extent that there are internal private placement markets in Latin American countries, they are generally very nascent markets, in their early stages," said Stern. x