by John Rumsey

After a rocky 2007 for Brazil’s nascent securitization market, which is characterized by a conservative choice of underlying assets, volumes are starting to head back up. The structured market shrank from some $5.3 billion in 2006 to $3.1 billion last year, mostly through credit funds, FIDC, according to Jayme Bartling, senior director of structured finance at Fitch in São Paulo.

He notes that his figures strip out those securitizations that are designed purely for efficient tax management, common with factoring companies. Without a stronger real, the drop would have been more precipitous. Bartling expects volume to climb back to $4 billion this year.

The greatest interest in securitizing this year has come from mid-sized banks, which find equity markets closed. This spring also saw a return to form of diversified payment rights out of larger banks, including Banco do Brasil, Unibanco and Banco Santander, with volume that had not been seen since 2004.

Despite interest from banks in securitizing portfolios, volumes are not inspiring and there is limited room for growth. “We don’t see as much movement as we would like in the sector,” says Denise Moura, managing director and head of investment banking at Bradesco BBI in São Paulo. Local investors have reached limits on total private sector debt by volume and there is strong competition from other fixed-income instruments, particularly CDs from banks, she adds.

It is also hard to find appetite for securitized credit card receivables – routinely seen in developed markets – because of risk aversion, Moura says. “We are far from sophistication in terms of leverage, complexity of tranching or underlying asset classes,” she adds. The typical structure is a combination of senior and subordinated bonds and interest in a junior tranche is very limited. FIDC funds are based on a single asset class, although there are expectations that multi-receivable vehicles could start next year, says Moura.

Moving to a broader more liquid market will require a long educational process, says João Adamo, head of sales at investment management and structured finance specialists Vision Investments in São Paulo. Investors are only just getting used to the asset class, he notes.

Investor caution means that completing deals is now taking far longer. The change has been significant, says Bartling, adding that he has seen deals take up to six months to place, which makes it difficult to track volume accurately.

The change in the market opens a yawning chasm between expectations and what can realistically be achieved, Bartling notes. In one recent securitization, he saw the originator try to raise 1 billion reais, but manage only 25 million. And it has become a lot rarer to see single transactions, where a hedge fund or bank buys an entire portfolio.

Understandably, given a lack of investor enthusiasm, spreads are widening. Auto loans, one of the hottest sectors in Brazil, have flared to 112% in July from some 108% of CDI last year.

It is also unlikely that foreign investors will enter the market, since hopes of lifting a 15% withholding tax were abandoned. Local hedge funds remain very small, concentrating power in the hands of big, risk-averse retail banks, says Moura.

Given difficulties in placing deals and limited investor appetite, there has been relatively little innovation. However, RMBS is slowly progressing, with deals from banks including ABN AMRO and small financial institutions starting to look at the sector even though it continues to be focused on developers and pooling of receivables rather than mortgages.

Volumes in CRIs – funds with real estate receivables – have shown strong growth again this year, at 2.77 billion reais through the end of June, versus 2.34 billion reais in the corresponding period of 2005, the highest previously recorded volume, according to Cibrasec, the Brazilian securitization association.

For the most part, though, receivables continue to be linked to consumer credit, auto loans and payroll deductibles, says Adamo. Promising areas, such as precatórios, receivables from a legal settlement, have not yet taken off, he adds. But he believes that the local investor base is looking for new types of assets to diversify the credit portfolio. LF