Stuck in flat-line mode since the first round of presidential elections in early October, Brazil’s securitization market could show signs of life next month. That’s when Hampton Solfise aims to issue a R$136 million (US$37.2 million) investment fund backed by consumer loan receivables.
“It’s going at full steam in terms of distribution,” said Patricia Bentes, managing director of Hampton, a consulting firm specializing in securitizations. Named “FMAX” after originator and servicer Maxima Financeira, the paper would mark the birth of the receivable investment-fund vehicle in Brazil, known locally as FIDCs.
Unofficial price talk on FMAX is 110% of the CDI interbank lending rate. Banco Itau is the trustee and back-up servicer, and Banco Bradesco, the collection bank. Moody’s Investors Service has a R$100 million (US$27.3 million) senior piece at Aaa.br’ on the national scale and Baa2′ on the local currency global scale. An unrated R$36 (US$9.8 million) subordinated tranche will be taken down by Maxima.
Interestingly, the deal would come before left-leaning Lula takes office and possibly before he details an economic team and program. Uncertainty bred by those events is what has kept back non-government issuance in general. “Everybody is waiting to see what measures the government is going to take,” said Gonzalo Ivens Ferraz, director of structured finance at BankBoston Brazil.
But on this uncertain ground, it appears FMAX is blazing its own little trail. “So far there haven’t been any problems…and there have been face-to-face meetings with investors,” Bentes said. Maxima Financeira itself is running the sales effort.
Instead of hurting or delaying the deal, heady government risk may in fact endear investors to FMAX. The view at pension fund Petros is a case in point. Though Petros’ managers haven’t yet decided whether it will buy in, they see FMAX and similarly structured deals as potential ways to trim their government exposure, both directly and indirectly.
“We could use this fund as a way of diversifying our risk from government bonds and towards the consumer sector,” said Federico Sampaio, investment planning manager at Petros, which has R$17 billion (US$4.6 billion) in assets under management.
Other sources say the consumer sector would probably hold up well if the government were to manipulate its debt, as long as the domestic economy didn’t implode as a result – a possibility no one is entertaining right now.
But even if it lands smoothly amid the turbulence, FMAX might hit bumps down the road. The receivable investment structure is untested and, as such, aspects of the vehicle have not been worked through.
“There are complexities that some investors could find daunting,” said a Sao Paulo-based banker. “It will be good to see how FMAX does.”
One disadvantage of FIDCs is that a single pension fund can’t hold more than 20% of an issue. There are no such limits on plain SPVs. The ease of redeeming shares after a 90-day grace period could also spell problems for FMAX and FIDCs in general. In the case of FMAX, an array of potential trigger events enables shareholders to declare an amortization or to liquidate the fund.
On the other hand, there are tax advantages, the chief reason participants were lured to FIDCs in the first place. Under a conventional real-denominated securitization featuring the true sale of assets, the SPV is subject to value-added taxes on top of a marginal income tax and the CPMF financial transaction tax. FIDCs are exempt from the CPMF. Tax treatment also differs between closed and open-ended funds.
As an open-end fund, FMAX provides investors with a put on their respective shares in the fund prior to full amortization. Income tax is realized on gains of the value of the shares of the fund in relation to the previous month, payable monthly at a 20% tax rate. This is similar to the tax regime for debentures, naked corporate bonds that are staples of the local market.
Maxima Financeira is a finance company that extends credit to consumers to buy goods in a vast network of 1,500 participating retail stores. The purchases range from household appliances to construction material to furniture.
The trust will make revolving purchases of receivables originated by Maxima. A daily recalculation of the overcollateralization will temper the payment mismatch – the bonds paying a floating rate while the collateral charges are fixed. The initial overcollateralization of the deal is estimated at about 36%.
