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Structured bonds set to boom

27 Mar 2006

With local investors unhappy at the thought of buying lower rated local corporate debt, bankers expect a thriving structured product business to continue for many years in Latin America. Danielle Robinson reports.

"We see a lot of potential within the local markets for structured transactions," says Antonio Villa, director, emerging market origination at ABN Amro in Mexico."In 2005 there was close to $10bn issued in Mexico's corporate bond market, of which close to 20% was ABS or structured product, compared to 15% of the total corporate issuance the year before. This year we estimate 25% of total corporate peso issuance will be structured deals."

Mexico has about 30 frequent issuers that are investment grade but there are at least another 70 names that are not investment grade that need to tap the local capital markets.

They have done so through mortgage backed securities, partial guarantees and other structured products.

Vitro Envasses, for example, is rated triple-B locally. By securitising trade receivables — the payments it is owed for the sale of containers to companies like Grupo Modelo, Coke Femsa and Nestlé — it was able to get a local triple-A rating from Moody's and Standard & Poor's and a Ps500m five year issue sold at 120bp over TIIE (the country's equivalent of Libor), compared to no access whatsoever on a unsecured vanilla basis.

"There is not a single investor who will buy Vitro on a standalone basis in Mexico," says one senior banker in Mexico.

"By doing this structure they got access to the afores [pension funds]."

The trend is even stronger in Brazil, where the introduction of the FIDC special purpose vehicle structure for securitisations has spawned a market that is bigger in size than the country's plain vanilla corporate debenture market. FIDC stands for fundo de investimento em direitos creditorios. FIDC funds can be closed-ended, structured to issue one set of bonds backed by a single pool of receivables, or open-ended — which resemble a US master trust able to issue multiple securities backed by one receivables pool.

"This is a structure that has enabled lower rated companies to get funding," says Greg Kabance, head of Latin American structured products at Fitch Ratings. "These funds are set up to do securitisation and it has allowed the market to grow at all kinds of different levels. We have seen consumer loans, auto securitisation, local future flow deals — the works."

For the second year running, local securitisation in Latin America was bigger than cross-border securitisation.

In 2005 a total of $11.5bn of local securitisations were priced, compared with $8.9bn in 2004.

Mexico dominates

The biggest market is Mexico where the peso equivalent of $4.3bn of deals were priced. Mexico has one of the best developed mortgage backed securities markets in the region and last year a few mortgage lenders took the product to a new level by offering peso denominated MBS to foreign investors.

Brazil has seen the sharpest increase, with $4bn of real-equivalent issuance, up from $2bn in 2004. About $3.2bn of that was done using the FIDC structure, compared with less than half of 2004's volume having taken advantage of that vehicle.

Even Argentina, once the leader in securitisation in the region, has made a comeback. In 2005 companies raised $1.7bn in 140 ABS deals, a 250% increase over 2004 issuance.

Securitisation was a $3bn market for Argentina in 2001. After the default that amount plunged to $35m. But it has regained some ground, largely because ABS proved to be the only debt product that withstood the country's 2001 financial crisis.

"Most of the transactions outstanding at that time survived, because they were originally issued in pesos, so the 'pesification' never directly affected them," explains Eduardo D'Orazio, a senior Fitch analyst in Buenos Aries. "Also, while there was a spike in delinquencies and defaults of underlying assets, the credit enhancement for the transactions cushioned investors from taking any payment default on the securitised bonds."

Although mainstays like consumer and personal loan securitisations still dominate the Argentine ABS market, the types of receivables securitised have rapidly expanded to include equipment leases, trade receivables and deals backed by diversified pools of corporate loans.

Chile's securitisation market has also enjoyed a revival, with $860m of issuance last year from $315m in 2004, and in structures securitising auto loans, consumer loans future flows, credit cards and RMBS.

Colombia has been one of the most innovative securitisation markets, with borrowers needing at least a double-A rating to issue bonds to local pension funds.

The region's first non-performing loan-backed securitisations were done in Colombia, by Titularizadora Colombiana, a secondary mortgage market company.

Banco Banistmo, Banco Colpatria and Davivienda all issued subordinated bonds with partial guarantees to achieve a triple-A local rating and ensure access to the local corporate bond market.

This year should see the development of a consumer loan securitisation structure in Colombia, say analysts.

The lack of companies with a rating higher than the AA- cut off for Peruvian pension fund investment is expected to spur securitsation in that country.

According to the local rating agency Apoyo, structured products for infrastructure projects should take off in 2006, with deals for environmental and water sanitation projects, highways airports and mining developments all under consideration. 

27 Mar 2006