In the emerging market space, Bank of America's purchase of Merrill Lynch resonates far and wide. While the commercial bank has been a non-entity in the business since 2003, Merrill has been an active player at least through last year.
Indeed, the investment bank has a storied history in EM ABS, especially the Latin American region.
Whether BofA dismantles Merrill's EM ABS business, leaves it alone or builds it up, rivals have their ears to the door,although a couple key personnel changes since the beginning of the year suggest that a diminished EM profile might have been in the offing regardless of a sale.
Officials at BofA in New York and Merrill in both New York and London either declined to comment on the article or didn't respond to repeated requests for comment.
Latin America - Pivotal Deals
For some time, Merrill Lynch was a giant in Latin American ABS. A handful of sources said its rise in the business, and the attention garnered for some pivotal deals, is the handiwork of Michael Lucente. Hired in 1998, Lucente was promoted to the head of Latin American ABS by the end of the year and stayed perched there for most of a 10-year tenor. Earlier this year, he left Merrill to become CEO of Indonesian conglomerate PT Bakrie & Brothers, a company whose acquaintance he made while doing an export future flow transaction from PT Bumi Resources.
Lucente declined to comment for this article.
Under Lucente, Merrill became a familiar name in the future flows space. "Merrill did a lot of the historic firsts in this market," said a market source involved in some of those transactions. "One groundbreaker was the Nikkei deal for Banco do Brasil in summer 2001. That opened financial future flows in Brazil."
Amounting to $250 million, the Nikkei deal collateralized remittances from Brazilian nationals living in Japan. While similar deals had been done in Turkey and Mexico, it was a first for Brazil. BdB followed with a diversified payment rights (DPR) deal later that year, also via Merrill.
The bank remained active during the aftermath of the Argentine devaluation and the nerve-wracking lead up to the Brazilian elections of 2002. Both led to a plunge in cross-border volumes of Latin American securitizations that by some accounts exceeded 40% from 2001.
Once the political climate calmed in 2003, Merrill was there to ramp up. It not only brought stalwarts like Banco Itau and Banco do Brazil into the market, it also arranged a $500 million securitization of credit card vouchers from Brazil's Visanet, which priced tight despite the fact that one of the originator's shareholders, ABN Amro, backed out of the deal at the eleventh hour. The transaction went on to win ASR's Latin American deal of the year for 2003. One U.S. fund manager enthused at the time: "We'd do it all over again, maybe even a little tighter."
The Principal Shift
By that point, the pricing landscape was beginning to change, with conduits and monoline insurers putting out increasingly aggressive bids. This led to a significant shift in Merrill's thinking, according to sources familiar with the bank. As margins in the future flow space shriveled, the bank was easing into a principal approach to deal-making. "As the investor base changed, Merrill moved with them," said one source.
Up against wrappers like MBIA, which was parceling future flow deals out to re-insurers, Lucente's group teamed up with the re-insurance desk at Merrill. In a typical trade, Merrill might retain some on its balance sheet, sell part to the market and sell a portion to re-insurers, according to another source familiar with the bank's workings. This was apparently how Visanet was executed.
The arrival of more monolines in the primary space and amped-up conduit competition only tightened the squeeze on spreads. The future flow sector had become commodified. While some of its competitors moved into domestic markets and existing assets, namely residential mortgages, in Latin America in 2004 Merrill started to beef up an infrastructure practice in the region. Transactions followed that were backed by airport receivables, toll road rights and government obligations from Peru. At the same time, the bank held to its principal strategy. That approach, according to one source, was epitomized by a $634 million deal by Odebrecht in Peru. Backed by government payments to the construction company, the deal was pitched to investors as basically Peruvian sovereign risk, with a pick-up in coupon. "Merrill principaled that risk, bought the cash flows...put those flows into an SPV and sold [the issued notes] broadly to investors," said a source familiar with
the transaction.
The bank hadn't tuned out future flows altogether, however. In a landmark deal in 2005, which went on to earn ASR's Asian deal of the year, Merrill arranged an export-backed deal for Indonesia's PT Bumi Resources. At the time, ASR wrote: "Indonesia had not produced a single ABS deal since the Asian Crisis hit in 1997, and few predicted a comeback in 2005."
Apart from future flows and infrastructure, Merrill also remained a player in transactions backed by political risk insurance.
In 2006, Lucente, who had been navigating different areas at Merrill, formally settled into the principal side - which included areas outside of emerging markets. Augusto Urmeneta then became head of Latin American debt capital markets. In May of 2007, Reggie DeVilliers was hired from UBS Securities to work on the Latin American side for the global ABS team.
By that time, Merrill had also gotten its feet wet in Mexican existing assets. Roland Vigne, hired to drum up Mexican business, arranged a peso-denominated auto-lease deal originated by Navistar Mexico Units and closed in late 2006.
Emerging Europe, a London Affair
During the period in which the New York team was transitioning from future flows to infrastructure, Merrill was also busy arranging DPR deals out of London. Often partnering with another arranger - at least in the public realm - the bank brought to market deals for banks in Kazakhstan, Turkey and Russia. It also solely led a DPR transaction for Kazakhstan's Alliance, a credit card deal for Russia's Rosbank and DPR deals for Turkey's Denizbank and Finansbank.
Alex von Sponeck, director of EM structured finance, was responsible for most of these transactions, according to sources. Last June, Sponeck moved to Goldman Sachs as an managing director in the new markets area.
A PR official from Goldman declined a request for commentary from von Sponeck.
The word from rival bankers was that Merrill was aiming to get more involved in existing assets from the CIS and emerging Europe area, in particular Russia. But, while its peers have closed warehousing facilities for Russian originators, it was unclear whether Merrill had done the same.
In early 2006, talk surfaced that Merrill had a mandate to craft an RMBS for Finansbank. The deal, which would have been a first for Turkey, never surfaced.
Over the last year, on both the Latin American and emerging Europe side, Merrill has been much quieter, even while many of its competitors either push forward on warehousing front or close DPR transactions by selling to multilaterals or retaining deals. Nonetheless, the bank still has people in the area, and BofA will have to decide whether it wants to leverage Merrill's expertise and relationships or stay out of emerging markets.
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