As of the holidays, a hefty CDO was in the Brazilian market and drawing substantial interest, sources said.
Led by Credit Suisse and Banco Santander, the deal, called Credito Corporativo Brasil, has raised eyebrows as well, for reasons obvious to anyone who is even vaguely familiar with the ruin of CDOs in other countries.
The deal is structured as a receivable investment fund (FIDC), for several years now the vehicle of choice for ABS in the reais market. The senior shares are up to R$2.4 billion ($1.4 billion) and enjoy enhancement from a subordinated piece of up to R$480 million, or 16.66% of the total deal. The legal final is six months. Standard & Poor’s has given preliminary ratings of ‘brAAf’ and ‘brBBf’ to the senior and sub pieces, respectively.
Sources at the leads either declined to comment because the initial issuance of shares had not closed as of press time or they didn’t return requests for comment.
A couple of local market observers noted that Santander’s involvement was curious, given that the bank appeared to be competing with itself as it was a notable lender to large local corporates, a segment targetted by this FIDC.
Another intriguing element of Credito Corporativo is the participation of state-owned Caixa Economica Federal as the trustee. With current assets of R$156 billion as of June, Caixa is the country’s largest mortgage lender and plays a big role in a variety of sectors. There had been talk of Caixa’s involvement in ABS, but it typically centered on its potential as an originator.
The eligibility requirements for the underlying debt are manifold. Each requirement can be tightened as well if the others are not met with enough breathing room. For instance, the transaction seeks to throw off a return 150 basis points over the benchmark CDI rate. The excess spread would need to be consistent with an average yield of about 575 basis points over CDI for the underlying collateral in the event that other criteria were only just met; in other words, a worst-case scenario. If the portfolio had stronger features, then the portfolio spread could be lower.
The deal must have 12 obligors, and each instrument must have a rating of at least ‘brBBB-‘ or its effective equivalent, as well as a host of other requirements.
While a minimum of 12 obligors may seem a bit lax, especially in light of events abroad, S&P analyst Jean-Pierre Cote Gil said that, due to the other dynamic criteria, even the weakest possible portfolio wouldn’t automatically lead to a senior downgrade should two assets default.
“[Because of the excess spread and the subordination] the cash flows coming from the assets will be higher than the scheduled amortization of senior shares,” said Cote Gil. “We assumed a 22% net loss, [so] if you consider the worst-case portfolio composition, our sensitivity analysis indicates that a hit on the senior shares would require at least three asset defaults, with no recoveries.”
The assets behind the deal can be any variety of debt issued by companies, including but not limited to debentures, letters of credit, banking credit bonds (CCB) and banking credit certificates (CCCBs). At least 30% of the collateral, in terms of the FIDC’s net asset value, must be secured loan or secured debenture, and the other 70% unsecured.
Cote Gil said this deal was the first in Brazil collateralizing the debt of large corporates. The agency has also rated local SME CLOs for banks such as Banco Daycoval, Banco Rural and Banco BVA.
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