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Structured finance: For better, for worse

Sep 1, 2013

Secured financing has helped Latin companies access capital in the toughest of climates when markets otherwise prevented it. It is also proving useful when times are smoother. By Katie Llanos-Small

When Aeropuertos Argentina examined its options for a debt market debut in 2010, international interest in bonds out of the country was limited. The sovereign was negotiating Paris Club debt and attempting to swap bonds it had defaulted on nine years earlier. Another corporate borrower, food products-maker Arcor, had issued debt in November 2010. But it benefited from having extensive international operations.

So AA2000 also turned to its comparative advantage: it offered a bond backed by cash flows from airport usage fees, which would be collected offshore.

The fact a high proportion of those revenues were in dollars was among the selling points to investors, says Raúl Francos, CFO of AA2000.

The $300 million 10 non-call five-year bond was five times subscribed, and outperformed other Argentine credits in the year ahead. Without securitizing the deal against these future flows, raising cash would have been tough.

The deal characterizes one part of the history of structured and secured financing in Latin America over the past quarter century. Hampered by economic turmoil beyond their control, companies have turned to secured financings to raise the cash they would otherwise be denied.

In the late 1990s, PDVSA and Pemex used export receivables to securitize borrowings. PDVSA's $1.8 billion trade in May 1998 not only stretched to a 30-year tenor, but it was rated several notches above the sovereign. A few months later - and after Russia had defaulted on its debt, sending emerging markets into chaos - Pemex used a similar structure. Its $1.5 billion two tranche deal also found favor among the ratings agencies, with a triple-A label.

Airlines and banks frequently securitized their international receivables in the mid-late 1990s. Even phone companies participated, securitizing payments due for long distance calls.

"These were all dollar-based receivables, future flow receivables," says Mike Morcom, head of Latin American agency & trust sales at Citi. "And they were a mainstream for corporate financing."

Later, banks turned to future flow securitizations to raise cash. A stand-out was Banco do Brasil's securitization of future remittances from Brazilian workers in Japan, which it sold in 2001. But simpler forms of diversified payment right (DPR) securitizations - bonds backed by all the receivables coming through the international settlement system - became a popular funding strategy in the late 1990s and early 2000s.

Second wave

DPR securitizations continue today, as do export receivable securitizations. But as many Latin economies left behind the turmoil of the 1990s - and as corporate borrowers gained a stronger following among debt investors - the need to use export receivable securitizations simply to raise cash fell.

"In the early 2000s the new issuance of export deals began to dry up as a lot of the corporate clients doing future flow securitizations had graduated to unsecured dollar funding," says Morcom. "A company like Vale that used to do future flow deals no longer had the need for that type of financing, as they were able to go out unsecured on favorable terms. So it didn't make as much sense."

A second phase of structured financing emerged as borrowers looked for different benefits from the asset class. In Colombia and Mexico, for example, lenders made heavy use of RMBS to shift risk off their balance sheet and make space for more mortgage origination.

Mexican mortgage-backed securities started being sold in 2003. Government-backed lender Infonavit, which sold its first deal in 2004, is one of the few RMBS issuers present for most of the market's existence.

The face of Mexico's securitization market has changed sharply since Infonavit debuted. Non-bank lenders known as sofoles surged in the years leading up to the US subprime crisis, selling triple-A rated securitizations with little overcollateralization but backed by monoline insurers.

When those insurers ran into problems at home in 2007, spreads widened on the Mexican deals they wrapped.

Investors, spooked by the US subprime crisis as well as by specific worries about the sofoles, stepped back. Defaults forced the sofoles out of the issuance markets in 2009, the same year that rising spreads also pushed banks out. In the depths of the crisis, just Infonavit and its peer Fovissste continued issuing mortgage securitizations in Mexico.

"It was difficult, there was little demand and the rates were high," says Jorge Márquez García, head of the securitization program at Infonavit. "At the start of 2008 we were paying spreads of 100 to 150 basis points [over Udibonos]. In 2009 they were at 250 basis points."

Yet the relentless growth of Mexico's pension funds, the afores, is driving a return of the country's securitization market. The afores buy around 40% to 45% of Infonavit paper. Private wealth and insurers are also keen buyers.

In June 2013, BBVA Bancomer sold a 4.2 billion Mexican peso ($320 million) 20-year RMBS - the first such deal by a bank since 2009. And demand for Infonavit's February bond issue was seven times the 3 billion peso size. That allowed it to squeeze pricing to 196 basis points - and hit its lowest-ever yield of 3.3%.

"The pace of issuance growth has been lower than the pace of asset growth at institutional investors," says Márquez. "Assets under management at the institutional investors - asset managers, pension funds, insurers - have grown a lot. There is not enough attractive supply to meet the demand."

Going global

Growth of securitization markets across Latin America will vary much by country. In Brazil, banks must allocate 65% of their deposits to mortgage lending, making RMBS unnecessary. "Potential changes to the rule could see the market expand rapidly," says Ben Roger-Smith, director of structured finance at HSBC.

"There is a lot of potential in Brazil," says Katia Bouazza, co-head of global capital markets, Americas, at HSBC. "A large portion of the market, real estate, uses very little securitization. And Brazil is going through structural changes. The middle class is growing and that will increase demand for loans and create a new demand for securitization, as financial institutions may not be able to continue to finance all these loans."

For others, the next step is to attract foreign investors to the securitization markets.

International accounts are increasingly interested in dabbling in Latin America's local currency bonds, particularly in the more liquid markets like Mexico. But asset-backed instruments offer even more hurdles for dollar-based investors to participate than straight corporate bonds.

Not only do accounts need to hedge against moves in the currency, they also have to factor in local interest rate changes that could affect the flow of payments.

"You have that interest rate differential and FX differential," says Morcom. "So all else being equal, you could have zero asset losses and still lose money because of FX or interest rate swings."

Nevertheless, it is on the agenda for some. In 2012 Colombian mortgage securitization specialist Titularizadora Colombiana revived plans first conceived in 2007 for a cross-border issue, although such a deal has yet to come to market.

For others, surging demand at home makes international issuance less of a priority. "International investors are interested in these deals, but we have enough demand in Mexico that we don't need to issue internationally," says Infonavit's Márquez. LF



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