MIAMI, Fla. - In the wake of the Argentine pesification and default, crossborder MBS deals became the nio terrible of the Latin asset family. "Argentina derailed the cross-border MBS market and has caused a re-evaluation of the emerging market MBS in general," said Bear Stearns Senior Managing Director Jonathan Lieberman on the sidelines of Euromoney's Securitization in Latin America Summit.
The sovereign collapse underlined the asset category's acute vulnerability to such an event and investors and bankers turned to future flows to keep the structured market alive. Crossborder MBS transactions will eventually resuscitate, sources said, with Central America the most likely candidate in the near term and Mexico in the longer term.
Still, the mood remains extremely cautious and for the time being, it's the domestic markets that have the most to offer in the way of MBS. The message is clear for bankers: if you want a piece of the action, go local.
The blame for the MBS chill lies squarely with a handful of deals out of Argentina. Mortgages originated by now-stigmatized Banco Hipotecario Nacional (BHN) back these transactions. Assaulted on several fronts, all of the BHN deals have defaulted. The catalysts included the sovereign default; the pesification of dollar debt one-to-one, while the peso plunged against the greenback; Central Bank interference in contract provisions; and suspension of foreclosure actions, among others. The BHN deals, totaling US$616 million, didn't stand a chance.
Apart from the default, one of the transactions, the US$95 million BACS I Mortgage Trust, is tied up in legal problems. According to one source, "the trustee has filed a claim to invoke the inconvertibility policy" provided by Sovereign Risk Insurance, a 50/50 joint venture between ACE Bermuda Insurance and XL Insurance. "Sovereign has denied the claim and it will probably end in arbitration," the source added. Sovereign could not be reached for comment.
Market players have taken to heart the lessons gleaned from the BHN debacle. For one "you want deals that are structured outside the reach of the sovereign," said Jaime Rivera, Chief Operating Officer of Banco Latinoamericano de Exportaciones (Bladex). Since by their nature mortgages will always carry some local risk and be subject to domestic jurisdiction, bankers need to find other ways to mitigate sovereign exposure.
Central America emerges
One of the only Latin MBS deals to sneak into the U.S. market
over the last couple of years is a
15-year, US$61.5 million deal from Costa Rica Housing Corp. Bought by two U.S. insurers, the triple-A rated, US$49.6 million senior tranche priced at 95 basis points over Libor.
But even that deal has its detractors, given that the comparisons with Argentina aren't far-fetched. "If you look at the statistics on the mortgage pool, it's almost identical to the BACS transaction: the loan to values, the debt to income ratios, and the overcollateralization," said Sam Fox, head of structured finance at Fitch Ratings, the only one of the three major agencies to not rate the deal. In addition, the Costa Rica deal holds a PRI from Sovereign, just like BACS. Fox and others conceded that Costa Rica is not an Argentina, but the country's BB'/'Ba1' ratings still make it junk.
There is one crucial difference between the BHN and the Costa Rica deal, however, that played a key role in sinking the Argentine deals. "The main thing in the Costa Rican transaction is that the issuer is an offshore special purpose company," said Gary Kochubka, director of structured finance ratings at Standard & Poors. "In the Argentine case, they're actually Argentine trusts. Even if the Costa Rican government were to come through and make some changes, they can play with the asset pool, but can't re-classify the debt."
In any case, the few crossborder MBS deals on the horizon are expected out of either Costa Rica or other Central American countries. "There's a lot of resources being concentrated in that area," Lieberman said. One of the reasons is the region's relative isolation from the currently dysfunctional emerging markets.
But Central America faces one salient obstacle: its tiny size. "In Nicaragua, for example, maybe you can hit a US$200 million MBS market in total," Lieberman said. "But if US$150 million of capital comes into the country you can get the kind of inflation in housing prices that would blow most of the population out of the water." That begs the question that even the most deal-starved bankers scouring the isthmus must face: Are markets that small worth it?
And even in the larger countries the combined mortgage pool is a drop of water compared to the ocean in the U.S. According to Lieberman, the entire Latin American mortgage pool is now hovering at around US$10 billion. In jarring contrast, Fannie Mae has about US$1.4 trillion in issues outstanding as of June, according to the Bond Market Association's website.
Local MBS picks up slack
While the road to the MBS dollar market is peppered with potholes, structuring a local currency deal can be a smoother drive. In Mexico, Chile, and Colombia, the local MBS market is growing and Brazil is expected to produce deals once president-elect Jose Inacio Lula da Silva names his economic team.
Bankers and insurers at the Latin America summit said domestic MBS markets are capturing their attention. "We're looking into locally denominated deals," said Diana Adams, managing director of Emerging Markets at Ambac Assurance Corp. While Ambac is tapped out in Brazil, Mexico and Chile might offer interesting possibilities, she added.
Colombia heats up
For this month, Latin America's MBS chasers can expect action from Colombia. That country's Fannie Mae, Titularizadora Colombiana, is putting the finishing touches on a deal that was just recently upsized to over Ps650 billion (US$241.5 million) from the Ps478.9 billion (US$177.9 million) that jumpstarted the market in early May (see ASR 8/26, p. 1). According to a source close the deal, it is slated to price in mid-November and will get the same AAA' rating from Fitch affiliate Duff & Phelps garnered by the first tranche. The structure will be similar as well, with a partial guarantee from the International Finance Corp. (IFC) and an implicit guarantee from the government via low-income mortgages that comprise about one-third of the pool.
With this placement, Titularizadora will become the second largest issuer in the country after the government. It had originally been talked at a smaller Ps500 billion (US$185.7 million). "There was a larger pool of mortgages with the profile they were looking for," said a Bogota-based banker. "The raw material was definitely there."
Colombian banks are also striking out into MBS on their own. Bogota is brimming with talk of a non-Titularizadora MBS amounting to Ps150 billion (US$54 million). "Under our regulations, banks have been allowed to do this for quite some time," said one Bogota-based banker familiar with the emerging transaction.
Meanwhile in Mexico, the approaching debut of the country's first true MBS is creating quite a buzz, as the Sociedad Hipotecaria Federal (SHF) builds the country's first master trust, sized at nearly Ps10 billion (US$985.7 million) (see ASR 10/14, p. 17). Though all the major players are vying for the mandate to issue off the trust, some bankers see problems that still have to be sorted out for an MBS market to work. "There are a lot of factors the SHF has to resolve," said Luis Villalobos, CEO of Casa de Bolsa Banamex. "For example, mortgages are subject to the laws of the state where they originated. We're already isolating those jurisdictions where it wouldn't be viable to structure them."
The SHF is working to standardize the origination process of the special purpose companies involved in housing finance, known as SOFOLes, but hasn't cleared all the hurdles in that arena either. The criteria for property appraisals, for one thing, can be all over the map. Villalobos offers his own experience as an anecdote. "I was selling my apartment and two of the three appraisals I got varied by 40%," he said. In the end, he picked the middle figure.
Still, thanks to its potential size and the sovereign's investment grade rating, Mexico's looming MBS market is drawing Wall Street bankers and insurers. "We're following that market very carefully," said Ambac's Adams.
"We'd be interested in doing [Mexican MBS] locally," said Michael Lucente, director of the Latin America Structured Finance Group at Merrill Lynch. "They might eventually be done crossborder, but we believe the market is deep enough to take those deals locally."
Sources say a crossborder MBS market is unlikely to surface out of Mexico until the end of next year. Once a domestic market gets started, the main obstacle will be the currency swaps, given that mortgages are denominated in local currency. "I've heard that swaps are starting to price at acceptable levels for longer tenors so that they don't go bust," said Fitch's Fox. "There's a reason to believe they will come into play in Mexico." Sources say a seven-year swap is no longer prohibitively expensive and that might be long enough to execute a Mexican MBS deal in the U.S.
Chile keeps Southern
Cone MBS alive
In Chile, two banks are currently readying MBS deals, hefty by local standards. With state-owned Banco del Estado as originator, BanChile Securitizadora is pulling together a deal worth 2.89 million inflation-indexed units (UF) (US$65.3 million), the largest ever in the securitized housing market.
At the same time, Securitizadora Bice has a roughly 2.7 million UF (US$61.0 million) deal in the works backed by mortgages and housing lease contracts. The Bice team is adding a new ingredient into the local MBS mix as well. "The subordinated piece of these bonds is going to be flexible, with amortization tables you can modify," said Rodrigo Valdivieso, CEO of the securitizer. The subordinated tranche will probably be slightly over 10% of the total issue, while the maturity is pegged at 20 years.
No one sees Chilean MBS deals going global. "The country's overbanked and they have adequate liquidity with the pension funds," said Bear Stearn's Lieberman. "There's no reason to do a crossborder MBS deal there."