Argentina: MBS issuance felled by sub-prime contagion


Jason Mitchell
Published on:

Argentina’s asset-backed securities market shows no sign of slowing down but the sub-prime crisis has killed off the country’s nascent mortgage-backed securities market.

Total securitizations in Argentina in 2007 amounted to Ps8.4 billion ($2.7 billion), and ABS contributed 83%, according to Standard & Poor’s. In 2006, total securitizations added up to Ps7.5 billion and ABS made up 80%.

Last year, four-fifths of ABS issuance was by local department stores and electronic goods stores, including Fravega, Garbarino and Red Megatone, according to local investment bank Banco de Valores. The other 20% was issued by credit-card and store-card providers, including Tarjeta Shopping and Tarjeta Naranja.

Before the sub-prime crisis broke, an MBS market was starting to reappear. In 2005, total MBS issuance amounted to Ps623 million, in 2006 the figure was Ps255 million, but last year issuance was just Ps44 million, according to Banco de Valores.

Spreads on longer-term transactions in Argentina mean that mortgage-backed issuance would be unaffordable for most borrowers at today’s rates. Argentina’s debt spreads over comparable US treasuries were about 470 basis points on JPMorgan’s EMBI+ bond index in mid-February against 195bp at the end of January 2007.

Ignacio Estruga, an emerging markets structured finance analyst at Standard & Poor’s, says: "We expect ABS issuance in Argentina to remain stable despite the worldwide market disruption. We do expect issuance to ease up at times because of the global market’s uncertainty and high volatility, but it will remain active because of issuers’ funding needs."

Local pension funds, which have $30 billion under management, have had a strong appetite for ABS because they are low risk and of short duration (the average tenor is five months). They have not been prepared to invest in MBS, mostly because of uncertainty about the country’s inflation rate (8.6% officially, around 20% unofficially) and future macroeconomic direction.

The country’s legislature is threatening to remove the tax benefits enjoyed by fideicomisos, the securitization vehicles used in Argentina. Issuers do not have to pay any profits tax but congress wants to levy 35%, which could raise up to $700 million a year. Experts say that this move might well kill off the booming ABS market.

Alejandro Bedoya, board secretary at Banco de Valores, says: "The proposed new tax law would have a bigger impact on ABS issuance in Argentina than the sub-prime crisis."

Local MBS issuers started to find international demand for their securities before the sub-prime crisis. According to Banco Hipotecario, its lending for the first nine months of 2007 was up by 350% on the same period of 2006. Its 20-year mortgage, fixed at 9.75%, had been popular but it was pulled when the crisis broke.

Today, it has no products of that duration and is promoting a 10-year mortgage fixed at 17.25% and a five-year mortgage fixed at 15% (the benchmark 30-day peso prime rate stands at 12.07%, up from 9.6% a year ago).

However, now there is little mortgage origination in the country, as people cannot afford those rates. Lenders are able to fund mortgage demand from their deposit accounts and do not need to issue MBS.