The appetite for straight Brazilian exposure among risk-seeking foreign investors appears to be hearty. Union National recently sold to about 15 hedge funds R$350 million ($163 million) in a receivable investment fund (FIDC) backed by discounted trade receivables from a variety of medium and small Brazilian companies. Some R$150 million has been funded, while the other R$200 million has already been allocated but not yet paid out, according to Samy Podlubny, a partner at BCP Securities, the placement agent. Shares in the fund mature in December 2008 and carry a national scale rating of A+' from local agency Austin Rating.

The type of hedge funds that buys into an FIDC isn't too concerned about the provenance of the rating and, in this case, about the fact that there is no global scale assessment, Podlubny said.

Union National is a leading factoring company in Brazil. This transaction represents a departure from other FIDCs parceled out to buyers abroad in that investors didn't have to enter Brazil to purchase shares. The Union National fund features a Delaware-based trust that is backed by the onshore FIDC. Foreign investors buy shares in the trust instead of the underlying FIDC. "That's a huge difference," said Frederico Porto, a foreign associate with Andrew Kurth, which acted as deal counsel. "It becomes an international capital market instrument instead of the investor having to go to Brazil."

While the fund doesn't guarantee a particular rate of return, the yield can turn out to be quite high in reais. For instance, the receivables being assigned to the trust are discounted 2% to 5% per month. The risk for foreign investors that have bought the shares unhedged lies in currency depreciation. There is a loss in dollars if a drop in Brazil's real against the dollar exceeds the return on the FIDC. Of course, the contrary scenario can translate into staggering gains.

Union determines which companies are brought into the collateral. Banco Itau, the transaction's custodian, must okay each candidate, which is then vetted by a credit committee. Oliveira Trust is the fund administrator.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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