With the senior unsecured market closed or too expensive, Latin American financial institutions are turning to the products of yesteryear to raise funding.
Last month diversified payment rights issuance, often referred to as MT-100 securitizations, came to prominence again in Latin America after first taking centre stage at the beginning of the decade.
On March 23, Brazil’s Banco Bradesco completed one such deal, when it raised $100 million through a securitization of future diversified payment rights from its international electronic transactions. The six-year notes were placed with a single investor, with the price rumoured to be in the region of Libor plus 200 to 300 basis points. WestLB managed the transaction.
Peru’s Interbank is planning to issue a $150 million DPR securitization too, with two tranches – a $120 million six-year and a $30 million 10-year. The all-in-cost to the borrower is expected to be about Libor plus 500bp to 600bp. Deutsche Bank is arranging the deal.
Santander Chile and Brazil’s CSN are also rumoured to be considering MT-100 transactions.
Last year, Brazilian banks alone issued $2.3 billion in DPR securitizations. This compares with volumes for all Brazilian cross-border securitizations, including DPRs, of $1.1 billion in 2005. Peruvian banks BCP, BBVA Continental and Interbank all raised money using the structure in the past 12 months too.
Diversified payment rights are typically wire payments from banks in hard-currency countries to banks in emerging markets.
As financial markets turmoil persists, institutions seeking dollars will have to continue looking at alternatives, such as DPR securitizations, to plain-vanilla issuance, even though borrowing costs have increased.
DPRs are particularly attractive because they mitigate FX risk. They also sidestep country risk issues. Instead of looking at the credit risk of the issuers’ underlying country, investors need to consider the ability of the borrower to perform and for the cashflows to continue going through offshore vehicles. A final bonus of DPRs is that even if the issuer defaults, investors can relatively easily get access to the currency flows.
Securitization will stay particularly in vogue in Latin America where the flow of remittances, commodity-linked exports and foreign direct investment provide a well-established hard-currency flow for DPR deals.
