A VISIT TO the glass tower blocks of the famous Faria Lima street in São Paulo reveals that the offices are filling up fast. Foreign banks are investing in Brazil with vigour as they expand their operations to access opportunities in Latin America’s biggest and most exciting economy. "Going down this road there are a large number of new commercial buildings. Two years ago the few that were here were only 50% occupied, now they are 100% filled," says Pedro Bastos, CEO of HSBC in Brazil, as he triumphantly gestures out of the HSBC tower, just one of the blocks on the street.
But why is this happening now? It would seem that the equity market boom is in full swing but many banks are too late to jump on that particular bandwagon. Instead there is another trend – securitization – that is making bankers return to Brazil, having left in 2002 as the crisis in the region reduced banking opportunities to all-time lows. But it isn’t just growth in the securitization market in general that is attracting them. Yes, the real estate market, and so RMBS and CMBS markets, are expected to be big, but that is still a few years away from really taking off. Rather, right now, many of these foreign players are eyeing up the receivables securitization market and the investment fund structures used for these assets.
"It is not easy for the foreign banks to enter [the structured finance] market," says Denise Moura, director and head of structured finance at Bradesco. "The big local banks, like us, are well established across all products. The foreign banks probably see the securitization market, and the receivables investment funds [fundos de investimentos em direitos creditorios – FIDC], as a good way in."
The FIDC story has reached a turning point. In 2006 the FIDC market was the engine behind a rapidly growing securitization market, and although the rate of growth is slowing, there is still huge potential. "I think we will see further expansion throughout the securitization arena, with one of the main drivers being FIDC structures," says Juerg Haller, deputy CEO of UBS Pactual. "Brazil is a country with very low leverage, which creates huge potential in this market. Now most banks are looking at this opportunity."
Foreign banks take action
Foreign banks are not just looking. Some are buying local rivals. In the past two months, for example, foreign players have bought four mid-sized banks and more acquisitions are expected.
In June Société Générale opened a new office in Brazil that has a focus on the securitization market. To prove its commitment to the region Société Générale recently bought local mid-sized banks Banco Cacique and Banco Pecúnia. The French bank hopes to arrange securitizations of payroll deductible loans and auto loans originated by its Brazilian acquisitions.
Following hot on SG’s heels is BNP Paribas, through its Cetelem subsidiary, which has just bought Banco BGN, a leader in consigned credit in Brazil. Dresdner Kleinwort, meanwhile, is rumoured to be in talks with Banco BMG. Other foreign banks that have been tipped as looking to buy include Lehman Brothers, Goldman Sachs and Merrill Lynch. One rumour has linked Lehman to Banco Fator, a mid-sized investment bank, which has emerged as a leading brokerage in the country.
In July Lehman Brothers announced that it had hired a team of investment banking professionals from Rio Bravo, a leading investment advisory firm in Brazil that has been active in the securitization market since its inception. "Hiring the Rio Bravo investment banking team underscores Lehman Brothers’ commitment to expanding and strengthening our capabilities in Brazil," says Joseph Gatto, co-head of global corporate finance at the firm.
But as these bulge-bracket banks all try to jump headlong into the securitization market in Brazil, some analysts are already suggesting that they have arrived too late. After four consecutive years of bumper growth, FIDC issuance volumes are unlikely to be as strong this year. In the first half of 2007 about R$7 billion-worth ($3.47 billion) was issued but issuance has slowed in the past couple of months. In 2006, volumes in the FIDC market hit R$13 billion. One big transaction came from Votorantim for nearly R$1 billion, but average sizes are about R$100 million. Despite this, new originators, investors and service providers are continually entering the market. This offers compelling evidence that there is still growth and money to be made out of the market.
The FIDC emerges
The FIDC market was created in November 2001 following the passage of a central bank resolution. This allowed companies and banks to finance themselves through securitizing their receivables, with the rules of operation set forth by the Brazilian securities and exchange commission (Comissão de Valores Mobiliarios – CVM). Before the change, securitization had been basically unheard of in Brazil because the development of the special purpose vehicle that the transaction needed was simply infeasible from a tax perspective. Not only did the entity that wanted to securitize have to set up a whole new company with a board of executives, and an office base; it also had to pay the taxes that any normal company paid. This included the CPMF tax, which levies 38% on any funds that are transferred between accounts in Brazil. The tax showed how little sense the SPV financing route made.
"The creation of the FIDC was a watershed event in the Brazilian market," according to a report by Uqbar, a company that researches the development of the securitization market in Brazil. With the law change companies were finally able to place all their receivables into a single fund structure that could then be securitized, and they therefore reduced the funding costs and tax liabilities that they faced, as well as improving their balance sheets. "The FIDC is an important tool," says Carlos Fadigas, CFO at Braskem. "It cleans the balance sheet. We can transfer our risk of collecting these receivables to the FIDC structure and in turn we can protect our balance sheet and account it as a reduction in receivables instead of accounting it as debt. It helps us optimize the working capital of the company."