MIAMI - Latin American telenovelas often follow a Cinderella narrative: young heroine is poor and mistreated; she meets a moneyed suitor; she blossoms into a gorgeous creature and, when the show is over, into an obscenely wealthy global celebrity.
Over the last few years, leading cross-border originators from the region have traced a similar arc. At Euromoney's Fifth Annual Securitization in Latin America Summit, attendants discussed the current Cinderella moment for issuers, which felt like eons from the first Summit, held in October 2002.
Then, many leading issuers were locked out of the market by Argentina's devaluation and Brazilian elections. Now, three and half years later, it seems everyone's eating out of their hands.
"Cash flows have been so tremendous, we haven't tapped the market since September 2004," said Fernando Kamache, corporate finance coordinator of oil giant Petroleo Brasileiro. And its last visit to the cross-border securitization market was even further back, in May 2003, when it placed a $550 million deal collateralizing heavy fuel and bunker oil. Since then it has used its excess cash to buy back about $1 billion of outstanding future flow deals.
The story's much the same throughout the region, attendees said. As steep commodity prices have held, the originators that used to provide the bulk of cross-border volumes can afford to be fussy, and more significantly from a long-term perspective, domestic markets are absorbing more and more paper. The changes, both cyclical and enduring, have set new rules of the game for arrangers, investors, guarantors and other participants, a recurring theme at the Summit.
"We have witnessed a total transformation of our market in the last ten years," said Michael Lucente, managing director in the structured finance and principal investment groups at Merrill Lynch.
Total securitization issuance in Latin America's domestic markets surpassed cross-border placements for the first time in 2004. Last year, domestic securitizations hit $11.2 billion, soaring past the $3.2 billion placed in the cross-border market, according to data from Fitch Ratings and ASR.
Torrential cash flows and easy access to alternative funding have not only dampened overall activity on the cross-border front, but have naturally emboldened issuers to demand razor-thin spreads. At these prices, some investors have stopped biting.
Violet Osterberg, a managing director of fixed income credit at Pacific Life Insurance Company, said that, in emerging markets, there was more attractive paper from non-Latin American securitizations last year. "We saw very little value in Latin America," she added.
The spread tightening among Latin American structured products is a function of cheaper funding for emerging markets in general. Lucente pointed out that sovereign paper from emerging markets is currently trading tighter than their peers in the high yield world.
Osterberg encouraged arrangers to stalk the region for second-tier issuers to usher into cross-border territory. "There's no reason that a securitization that only gets a double-B rating couldn't be placed," she said. "I believe there are strong companies in every country, that, because they're not global in nature, haven't been able to do a securitization. That's where we're going to find value."
Another way to find value is for foreign investors is to buy domestically, participants said. That has worked in Mexico, where RMBS and one or two other asset classes has attracted money from abroad. Hedge funds were the first to come in, but attendees said that institutional players like pension funds and mutual funds are now getting into the act. The burning question for many investors is whether to take on the currency risk directly - an appreciating local currency can boost a domestic bond's dollar returns to the stratosphere, but a depreciating one can wipe out any gains. Osterberg lamented that good hedge products are still unavailable to investors like Pacific Life that would be interested in local instruments but are unwilling to take the currency risk straight on.
While local liquidity in the region's largest markets has given many originators the luxury of ignoring foreign investors, issuers know the good times can't last forever.
Titularizadora Colombiana, for instance, has been considering a plan to place a portion of its RMBS with foreign investors, according to Alberto Gutierrez, president of the mortgage securitizing agency. Domestic appetite in Colombia is still hearty for Titularizadora's paper, which totals about $1.7 billion outstanding in local currency, but the agency understands that local liquidity will thin out at some point. "Obviously in the long-term it's important to count on different [sets of] investors," Gutierrez said.
Diversification also works in the other direction. A longtime darling of the cross-border market, Petrobras, has started to raise domestic funds in the Brazilian market by securitizing real estate assets, primarily to take advantage of tax incentives but also broaden its investor audience to include more domestic buysiders. Last September, the oil giant issued R$200 million in a 10-year securitization backed by its lease payments under a "built-to-suit" lease agreement. The funds financed the construction of buildings. The company aims to issue around R$1 billion of these CMBS over the next two years to finance an array of infrastructure projects, including work on refineries, a heliport and buildings to house the company's expanding workforce, according to Corporate Finance Coordinator Kamache. The next CMBS will be for a dry dock.
While Brazilian CMBS continues to overshadow RMBS in that country, nothing, it seems, can steal the thunder from Mexico's RMBS, which has turned into the bread-and-butter sector for a wide swathe of Latin American players. RMBS issuance should exceed the local currency equivalent of $1.3 billion in 2006, according to Manuel Campos, vice president of Hipotecaria Su Casita, one of the country's leading non-bank originators known as Sofols.
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