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Brazil is on the verge of becoming the next securitization frontier. Falling interest rates, a booming credit market, repressed demand in the housing market and the agribusiness bonanza have all contributed to the development of this market.
Improvements in the legal framework for structured finance transactions and an incredibly diverse pool of securitizable assets, including everything from consumer and payroll deductible loans to collateralized debt obligations, are also playing their part.
Already Latin America’s largest according to Deutsche Bank, the domestic securitization market grew by an annual 20% to USD 5.4bn last year, the bank said at a Sao Paulo seminar it sponsored in March.
Although the estimated size of the market varies depending on how it is defined, there is evidence opportunities are almost unlimited. “We have this issue in every country,” says Greg Kabance of Fitch Ratings about what is regarded as a securitization deal. “People could be overestimating the market because some transactions are asset purchases with no debt attached to it.”
In the sugar and ethanol sector, up to USD 7.5bn in non-performing loans could be restructured for securitization purposes, says Amaury Junior, CIO of Vision Brazil Investments, a Sao Paulo-based hedge fund providing USD 600m in junior and mezzanine finance for the sector. “We are providing mezzanine finance for industries that historically have not been catered to by the capital markets,” says Felipe Nobre, one of Vision’s portfolio managers.
Structuring deals in uncharted territory is leading to innovation and a wealth of new deals. One of the first structures devised in Brazil consisted of a securitization transaction involving cash deposits made regularly by the dekasseguis for their relatives in Brazil. Dekasseguis are Japanese descendants who migrate to work in the land of their forefathers.
“Some believed we couldn’t do it saying it would be like securitizing smoke. Today they securitize carbon credits. Talk about smoke,” says Fabio Ohara of Rio Bravo, a Sao Paulo securitization firm. Less fancy are securitizations using university tuitions as collateral, already 1% of the domestic market, according to Deutsche Bank.
FIDCs, or credit asset-backed funds, are the most common securitization vehicles in Brazil while CRIs, a mortgage-backed instrument, has come into fashion after new laws gave borrowers greater protection.
FIDCs introduced a variety of asset classes and are finding favour with state-run companies, especially utilities, and private issuers alike. In Brazil, auto finance is the most usual underlying FIDC asset, though investors are indulging in bolder kinds of securities trades.
In the March seminar, buyers and sellers discussed opportunities in the market for precatorios, or court-mandated sentences where the government is obliged to make payments for claims arising from tax settlements and other types of litigation.
“The precatorio is a final pay order of a judicial claim and involves two types of risks, that of a default from the state and the contingencies of the originator,” says Vision’s Nobre, with USD 300m in precatorios, restructured debt and non-performing loans under management.
Whereas the federal government will typically not default on such an instrument, states and municipalities may be unable to service these obligations due to provisions in Brazil’s Fiscal Responsibility Law, Vision’s Nobre says. Additionally, only the federal government is allowed to tap capital markets and an event of a default could limit its access to funding.
Listed Sao Paulo state-run utilities Cesp and Sabesp have been issuing FIDCs to securitize receivables and to lower borrowing costs. If Cesp goes ahead with a 10-year FIDC issue to raise USD 600m by mid-year as planned, it will be Brazil’s longest maturing deal ever.
Yet another Sao Paulo state-run company joined the fray recently, pushing the envelope in the process. CPTM, a metropolitan rail operator in the nation’s biggest city, securitized USD 100m in ticket sales. The deal represents the first “de facto” future flow transaction in the local market as there is no contract binding commuters and the company to guarantee the receivables.
The CPTM FIDC lured the Brazilian Development Bank (BNDES) to the market, which bought 50% of its senior tranche, and the structure was praised as a smart way to tap the market, avoiding the borrowing restrictions placed on government-controlled enterprise.
Yet these developments pale in comparison to expectations in the Brazilian housing market and the alternative structures that are expected to support it financially, sources say. The Ministry of Cities is currently estimating a housing deficit of 8m and there are expectations that asset-based lending in the real estate industry could outgrow the entire securitizations market at its present size.
Real estate securitizations have accounted for only 15% of deals, says Deutsche Bank, citing shortcomings such as regulated pricing mechanisms for mortgages, inadequate loan standardization, disincentives for banks to move mortgages off their balance sheets and an incipient secondary market.
Unlike in Mexico and the US, where mortgage-backed lending is the driving force of the market, Brazil’s structured finance industry resembles more that of Peru, says Patricia Bentes of Hampton Solfise, another securitization firm.
In time, however, deals in the real estate sector should boom on a combination of better creditor protection and improved asset-liability management on the part of banks, not to mention demand from low-income borrowers and the urgent need for non-bank finance for construction companies.
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