Colombian ABS players thirsty for action can toast to Bavaria. The regional beer peddler is linked to two transactions: one is a straightforward securitization to raise market funds, the other a CDO linked to arbitrage opportunities.

Bavaria recently handed a mandate to local brokerage Correval to structure a securitization of forward contracts of barley and malt, according to a source familiar with the transaction. The program would roughly amount to the peso equivalent of US$150 million and would be marketed only to domestic investors. The architecture would fit the mold of sugar deals done locally, the source said.

Last year, sugar refiners Incauca and La Cabana closed deals backed by sugar forward contracts for a combined Ps120 billion (US$44 million). Correval rivals Corfinsura and Mercancias y Valores led those transactions, which were both graded triple-A.

Bavaria risk is also all over a CDO program structured by Finanzas Estrategicas. Seeking to capitalize on arbitrage between foreign and local interest rates, the local shop has set up a US$100 million program for domestic investors backed by Bavaria's 144A 8.875% 2010s, sized at US$500 million. Citigroup led the issuance of the collateralized paper in the U.S. market in October 2003. It priced at a discount of 99.3550.

Finanzas has already placed US$47 million of the CDO in two tranches and aims to do more every time the window of opportunity cracks open. "It all depends on market circumstances," said Fabiola LaTorre, portfolio manager at Finanzas. "And we have two years to hit US$100 million."

In the vein of other CDOs executed in Colombia and Chile - and in the pipeline in Mexico - the Bavaria transaction takes advantage of restrictions on pension fund investments in foreign bonds. That often translates into latent demand for cross-border paper, even when it is high yield. That's because, translated to the national scale, the creditworthiness is often top-drawer. In the case of the Bavaria CDO, the rating is AAA' on the national scale from Fitch Ratings affiliate Duff & Phelps, while the underlying paper is BB' on the foreign

currency scale, at the same notch as the sovereign. Moody's Investors Service and Standard & Poor's rated the 2010s Ba3' and BB', respectively.

While this class of CDOs sometimes includes currency swaps and other derivatives, the currency risk of the Bavaria deal is being assumed by the investors. As such, the deal is a perfect mirror of the collateral, with Colombian investors receiving 8.875% on their purchase and the dollars swapped into pesos at the prevailing rate on the date of payment. Finanzas profits by buying the paper at a discount.

Bavaria's 2010 has followed the rhythms of its asset class, which for much of this year has meant severe bruising at the hands of increasingly risk-averse investors. But, according to one trader, recent M&A speculation has given the paper a boost, no doubt stifling the arbitrage opportunities being sought by Finanzas. At last quote, they were bid at 101.5.

Based in Colombia, Bavaria has a virtual monopoly on the beer markets of a few Andean countries, and is also a dominant player in other beverages. Owing to a recent expansion binge, the company ranks as the 11th largest brewer globally.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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