Latin American companies were able to craft some innovative structured finance transactions last year despite the fact that many emerging markets deals were sidelined because of volatility in the international capital markets.
Deals that were executed had a focus on future flow transactions and increased political risk insurance provisions. “Overall, more than 50% of issues by dollar volume had some type of credit party enhancement in 2000,” says José Ramón Tora, Latin American structured finance analyst at Standard&Poor’s in New York.
The $300 million iron ore and pellet export receivables securitization for Brazilian iron ore producer Companhia Vale do Rio Doce (CVRD) is the winner of the LatinFinance structured finance deal of the year. It was the first future flow export securitization rated three notches over the sovereign foreign currency ceiling by Standard&Poors and a transaction structured to mitigate currency and country risk.
“It was the largest securitization with the longest maturity for a local Brazilian corporate and the first time MBIA [Insurance Corporation] insured a Brazilian securitization,” says Nicole Mallette, vice president of the global asset-backed securitization group for Banc of America Securities. “We had to do a lot of work to get [MBIA] comfortable with both Brazil country risk and CVRD,” she adds. The transaction received ratings from all three ratings agencies.
Trust Account in US
CVRD sells iron ore and pellet products to CVRD Overseas Ltd, a wholly owned offshore affiliate of CVRD, which in turn sells the iron ore and pellet exports to CVRD Finance, a charitable trust in the Cayman Islands. CVRD Finance, acting as administrator, supplies CVRD’s six international customers with the pellets and the customers deposit payments to CVRD Finance into a controlled trustee account in New York managed by J.P. Morgan, formerly Chase Manhattan Bank, the trustee. Locating the trustee account in New York gave investors more comfort that sovereign redirection risk and transfer and convertibility risks were reduced, explains Mallette.
Bookrunners Banc of America Securities, Liberal Banking Corporation and Tokyo-Mitsubishi International marketed the $200 million securitization to a variety of AAA and BBB investors. The split between the covered and uncovered tranches was structured according to investor demand, and was split between $25 million, seven-year notes with a coupon of 8.683%, $125 million, seven-year floating rate notes guaranteed by AAA-rated MBIA, priced at 65 basis points over Libor and $150 million, 10-year notes with a 8.926% coupon. Thirty investors purchased the notes, with 70% placed with institutional investors in the US and 30% with overseas banks. The $125 million tranche with the MBIA guarantee was rated AAA by Standard&Poor’s and the unwrapped tranches were rated BBB.
The $125 million tranche achieved an AAA rating because of the MBIA insurance and by overcollateralizing the transaction, explains Banc of America Securities’ Mallette.
The arrangers mitigated the risks of the Brazilian government diverting foreign currency earnings to the central bank or the iron ore to companies that CVRD has no agreement with by paying receivables into the collection account maintained by the trustee, subject to the laws of the Cayman Islands. The fact that iron ore is sold to steel mills and there is no spot market for iron ore gave further security.
Foreign Exchange Earnings
The securitization mitigated transfer and convertibility risk, the risk of currency devaluation, by requiring CVRD Finance to have a foreign exchange earning potential of four and a half times the value of its debt as security for the transaction by Standard&Poor’s, and maintaining equity of at least $85 million by Fitch.
Receivables generation risk, the risk of customers discontinuing their business with CVRD, is reduced by the longstanding historical relationships of the customers to CVRD, their commercial strength and the diverse nationalities of the customers from Asia, Europe and the US.
Although the number of structured finance transactions for oil and gas deals decreased in 2000 as Mexican companies issued in the local market or obtained unsecured debt in the international capital markets, there was an increase in securitizations for Argentine companies. Merrill Lynch led the first public capital markets transaction with OPIC risk insurance coverage for Transportadora de Gas del Norte. The $175 million convertibility risk insured bonds (cribs) had a tenor of 12 years with a coupon of 10.875%, priced at 150 basis points through Argentina’s 2010 bonds.
With transactions sidelined as political risks in some Latin American countries and concerns over currency risk prevail, Standard&Poor’s Tora expects that there will be an increase in future flow transactions and continued growth in credit enhancement this year. Insurers should begin to offer new types of partial guarantees and risk insurance for structured deals.