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Latin American Structured Finance 2020 Outlook: Brazil Will Continue Driving Issuance

S&P Global Ratings believes that in Latin America, there is a significant funding gap for nonbank financials, speculative-grade issuers, small and medium enterprises (SMEs), housing, and infrastructure. We also believe the challenging economic environment could require structured finance solutions for issuers that want to tap the capital markets. The region's need for investment is highlighted in its rankings for infrastructure readiness and financing for SMEs in the World Economic Forum's Competitiveness Report for 2019 (see table 1). Its challenging economic environment is also evident in its modest prospects for GDP growth (see table 2).

Table 1

World Economic Forum Competitiveness Rankings: Latin America Is Well Behind Other Regions
Global Competitiveness Index Infrastructure pillar Financing of SMEs
Argentina 81 68 132
Brazil 72 78 103
Mexico 46 54 85
Source: World Economic Forum's 2019 Competitiveness Report.

Table 2

Latin American GDP Growth Is Expected To Remain Weak
--Estimated GDP growth (%)--
2019 2020 2021
Argentina (3.0) (1.0) 1.5
Brazil 0.8 2.0 2.2
Mexico 0.1 1.0 1.5
Source: S&P Global Ratings.

Among the key markets that we follow, Brazil stands out. We believe that the passage of important pension reform there raises hopes for passage of tax, administrative, and other reforms that could boost GDP growth. Meanwhile, slow growth in 2019 and low private-sector confidence in Mexico limit its GDP growth prospects. In addition, Argentina faces a volatile exchange rate (which has depreciated sharply recently), high inflation, and a deep economic recession. This has led to the deterioration of its financial environment and strained investor confidence. Therefore, we expect the increase in SF issuance in the region in 2020 to be driven by Brazil.

Latin American structured finance issuance in 2020 should exceed the 2019 total. This will largely be driven by continued strength in issuance from Brazil, which we are forecasting to increase by about 20%. Very low interest rates--coupled with new issuance in residential mortgage backed securities (RMBS) and covered bonds--should be Brazil's key drivers. In Mexico, new issuance will stem from economic growth and growing investor confidence. In Argentina, there is significant uncertainty around the new government, and so our expectations for new issuance are low.

The region's trending assets are corporate repacks (mainly certificates of agribusiness receivables or real estate receivables in Brazil; CRAs and CRIs), securitizations of loans originated by fintechs in Brazil, and CMBS and equipment loans and leases in Mexico. As economic activity picks up and interest rates remain low, we also expect an increase in issuances from multi-seller trade-receivables transactions in Brazil.

In addition to these asset classes, there has been market interest in auto loans. And elsewhere in the region, consumer credit in Argentina and repacks in the cross-border market should continue.

Despite Weak Economies, 2019 Issuance Was Higher Than Expected

We estimate that marketwide Latin American structured finance issuance was $14 billion in 2019. This figure was above our forecast and reflects the impact of a couple of large issuances in Brazil and Mexico (in the corporate repack and CMBS segment). In 2020, we expect issuance to be approximately $15 billion (see chart 1.)

Chart 1


S&P Global Ratings rated about $6 billion in structured finance securities in 2019. The bulk of this was in the Brazilian market, followed by cross-border and Mexico. In addition, asset-backed securities accounted for the bulk of issuance in the region.

Table 3

Summary Of 2019 Latin American Structured Finance Issuance
Asset class Sale amount (Mil. US$)
Consumer assets 57.3
Structured credit 3.5
Total 60.9
Commercial assets 2,728.6
Consumer assets 229.3
Structured credit 91.6
Total 3,049.6
Cayman Islands
CMO 732.2
Commercial assets 1,020.8
Consumer assets 222.0
Total 1,975.0
Asset-backed securities 104.1
Commercial assets 89.6
Commercial mortgage 622.1
Total 815.8
Asset-backed securities 100.0
Total 100.0
Grand total 6,001.2

In terms of collateral performance, our focus remains on the consumer sector in Argentina, where the outlook is very foreboding. The political situation in Argentina is fluctuating, and pressures on the currency and the government's debt profile could trigger more drastic policy measures that result in a more protracted downturn in domestic demand.

At year-end 2019, there were 440 rated classes in Latin America. The bulk of these are divided fairly evenly among Argentina, Brazil, and Mexico. The majority of ratings are in the corresponding national scale. By contrast, we assign global-scale ratings to cross-border deals (those placed in the U.S. with assets located in a Latin American jurisdiction) and ratings from other countries in the region.

Chart 2


Brazil Will Remain The Primary Driver Of Issuance In 2020

During its first year in power, the administration of President Jair Bolsonaro has pursued policies and structural reforms aimed at strengthening Brazil's fiscal accounts and encouraging greater private-sector participation in the economy. The reduction in interest rates--combined with the release of the formal employee severance funds, which started in September 2019 and will continue through March 2020--should ensure more solid growth in the coming quarters. In addition, a reduction in fiscal risks, following the approval of the pension reform, and the passage of growth-enhancing policies should contribute to a more positive path for economic activity.

Residential mortgages.  Despite the recent uptick in the job creation, tax revenue, and increased business confidence, the housing shortage remains a substantial challenge for the government. According to its forecast, there will be 1 million additional families with at least R$3,000 in monthly income by 2030, one-third of which will be eligible to apply for the MCMV (Minha Casa Minha Vida) program. In that regard, the country will continue to face a massive housing shortage because the MCMV program and mortgage funding through FGTS (Fundo de Garantia do Tempo e Servico) are insufficient to meet the demand, and developers need much wider access to financing.

Given that issuances of CRIs soared 94% to R$15.8 billion in 2019 over 2018, according to the Brazilian Financial and Capital Markets Assn., we believe a similar trend will occur in 2020. As homebuilders look for new funding alternatives, the repackaging of their debt instruments into CRIs will remain attractive as long as these instruments are tax-exempt for retail investors. In addition, as domestic interest rates have fallen, investors are more willing to take on more credit risk in search of higher yields. Therefore, investors' appetite for CRIs, mainly backed by the homebuilders' repackaged securities, is rising.

Covered bonds or LIGs.  Although Brazil's National Congress approved a dedicated covered bond regulation in 2015, and the central bank approved a related regulation in 2017, banks only began testing this new instrument at the end of 2018. Public and cross-border placements are the next steps for covered bonds.

Corporate repacks via CRAs and CRIs.  After many years of sluggish performance, the improving economy continues to supports an increase in investments by corporate issuers. This and refinancing needs drive our expectation that companies will likely increase the issuance of corporate repackaged securities to access different funding sources, particularly private individual investors. However, if a potential tax reform removes the tax-exemption benefit, we believe domestic corporate repacks will be much less appealing.

Multi-seller trade receivables.  We continue to expect an increase in new trade receivables transactions after a few years of sluggish performance. We expect this growth to be mostly concentrated around a few large financial factoring companies and diversified agribusiness receivables transactions. This concentration reflects the impact the economic downturn had on companies in recent years, which exacerbated underlying operational risks associated with trade receivables and eventually affected the performance of receivable pools. Such risks include the difficulty in monitoring the fast-changing credit quality of small businesses and confusion between the individual and the company (which is common for family-owned businesses). Although we believe the remaining large factoring companies have strengthened their policies and practices somewhat, such operational risks persist.

Unsecured consumer loans.  The issuance of unsecured consumer loans has also slowed somewhat in recent years, as the increasing risk of delinquencies reflected higher unemployment rates and lower credit availability. Consumer lending with some more secure characteristics--such as payroll deductible loans--should continue to drive new ratings in this asset class. Such transactions usually are concentrated around public employees, who enjoy relatively high job stability, which allows for a lower delinquency rate than that of other consumer loans. As a result, our assumptions for base-case losses and stress factors for this asset type reflect the greater stability in performance, while available protections to creditors under these transactions allow for most ratings to remain high.

Credit card receivables.  The expansion of the use of credit cards in Brazil through traditional credit card issuers and fintechs will likely continue supporting an increasing number of credit card receivables transactions. The heated market for credit card merchant acquirers and sub-acquirers means that many players are aggressively seeking to expand their operations, which includes requiring adequate funding for their payment advancements to merchants.

Commercial mortgages via CRIs.  Although most of the CRIs we've rated recently are corporate repacks, there is interest around single-borrower CMBS transactions, and we expect a gradual increase in the number of such transactions. The bulk of such operations concentrate around shopping malls and office buildings through the sale of rents and a pledge of the building as collateral to the CRI. We continue to assess such transactions through the potential recovery to investors based on the stressed value of the pledged asset compared to the debt amount.

Brazil's ratings tally.  There were 150 outstanding ratings in Brazil as of December 2019. Corporate repacks and trade receivables are the largest rated categories, followed by payroll deductible loans. Brazil's assets are the most diverse in the region.

Chart 3


New Asset Classes Are An Increasing Share Of The Pie In Mexico

Mexico faces the risk that mixed signals emanating from key government policies (such as in the energy sector and in projects reliant on public funding), coupled with perceptions of increased discretion in policy implementation, will continue to erode private-sector sentiment and lower Mexico's trend growth prospects. In turn, this is likely to limit new issuance in 2020.

RMBS remains the largest asset class in Mexico, and we expect FOVISSSTE to tap the market again in 2020. Regarding new asset classes, we expect continued activity in the CMBS market. Also, we expect that equipment ABS transactions--and, to a lesser extent, unsecured consumer credit--will be active in the Mexican market. These companies rely on capital market funding to finance their activities. In aggregate, we expect that the share of RMBS in the total market tally will continue to decrease in 2020.

Residential mortgages.  The national housing agencies of Mexico (INFONAVIT and FOVISSSTE) continue to be the main players in the Mexican housing market. Given the stable funding base that they enjoy and limited growth plans, we do not expect a significant increase in issuance by FOVISSSTE in 2020. Furthermore, we don't expect INFONAVIT to tap the markets at all in 2020. In 2019, Infonavit announced that it would reclassify some credits on its balance sheet. In our view, this should have a minimal impact on the portfolios that support the RMBS issuances that we rate. Collateral performance remains in line with expectations, and we do not foresee an increase in delinquencies. The key downside risk is an increase in the unemployment rate (which we currently estimate at 3.8%) that could lead to higher delinquencies.

Equipment leases.  We believe that equipment lease originations will continue to grow at double-digit percent rates and will continue to access the securitization market to fund their operations. We have observed an increase in the nonperforming ratios on these transactions, yet overall performance remains in line with our expectations; our base-case loss assumptions on this asset class range between 3% and 7%. Given slowdown of economic activity in Mexico, we are closely following the collateral performance of our rated universe.

Unsecured consumer loans.  Consumer confidence in Mexico is high, and inflows from remittances remain strong. We expect a few consumer loans transactions, mainly in the form of payroll deductible loans or direct debiting loans securitizations granted by nonbanking financial institutions to low- and mid-income borrowers. Our expectation on the securitized portfolios is that they will maintain a stable trend, but in our view, weaker unemployment metrics and turnover in the public sector could affect performance.

CMBS.  In 2019, we rated a 15-year CMBS issuance backed by nine commercial properties that were developed by Grupo Gicsa S.A.B. de C.V. We have observed interest in this asset class from a number of participants in the market. We expect new issuances in this segment in 2020.

Mexico's ratings tally.  There were 140 outstanding ratings in Mexico as of December 2019. Although, the number of outstanding ratings has decreased, RMBS remains the largest asset class in this market. ABS equipment is the fastest-growing category.

Chart 4


In Argentina, Our Analytical Focus Is On Collateral Performance

Argentina faces significant economic challenges, mainly a volatile exchange rate (which has depreciated sharply recently), high inflation, and a deep economic recession. It also faces the deterioration of its financial environment and strained investor confidence. We estimate that Argentina's economy contracted 3% in 2019, and we expect it to contract another 1% in 2020, which will imply three consecutive years of decreasing GDP. We also expect further depreciation of the domestic currency and inflation to reach about 45% in 2020, which is having a direct impact on real income, consumption, and delinquencies. In addition, unemployment will likely remain stable at about 10.5%.

We expect stable interest rates following the downtrend initiated at the end of 2019. Based on the new administration´s current policies, we believe that there will be excess liquidity in the market that will benefit the allocation of assets in securitizations. Also, we expect more credit lines to the companies operating in the capital markets. Thus, we anticipate a slight increase in origination volume (on a nominal basis) given how low origination levels are currently. In addition, we do not expect the performance of the assets we rate to deteriorate further in 2020. The evolution of key factors like salary renegotiation and unemployment would determine a potential recovery on asset performance.

Consumer assets  We do not expect the performance of these assets to deteriorate further in 2020; we expect the companies to maintain current tight underwriting policies and restricted eligibility criteria.

RMBS.  We do not expect an increase in the origination volume due to the high levels of inflation, both in the past year and expected for 2020. In addition, as the local mortgage market is denominated in U.S. dollars, originating banks have increased the underwriting requirements after the strong currency depreciation that resulted in a decline in real income in 2019. However, we expect the performance of outstanding loans to remain stable per the low LTV ratio, which creates incentives for obligors to continuing paying-down their obligations.

Argentina's ratings tally.  There were 125 outstanding structured finance ratings in Argentina at the end of 2019. The main asset classes there were unsecured consumer loans and credit card receivables.

Chart 5


Cross-Border: Repacks And Future Flows Continue To Present Opportunities

Repacks.  We still expect repacks of infrastructure debentures issued by national governments to repay concessionaires across the region for various projects. We also believe issuances are possible in conjunction with the big infrastructure projects that remain in the loop in countries such as Mexico. In addition, there could be repacks backed by other assets, such as social bonds.

Future flows.  We continue to believe that future flows remain one-off opportunities amid stable commodity prices and the search for higher-yield securities by U.S. investors. On Jan. 16, 2020, we published our updated methodology and assumptions for rating nonfinancial future flow transactions globally (see "Global Methodology And Assumptions For Nonfinancial Future Flow Transactions"). These criteria consolidate a number of existing articles and modify certain aspects of them. Specifically, the changes focus on simplifying our approach and enhancing transparency. In addition, whereas the former criteria were only applicable in emerging markets, the new criteria are global in scope.

Cross-border ratings tally.  There are 25 cross-border ratings. The majority of these deals are repacks, followed by financial future flows, such as diversified payment rights.

Chart 6


This report does not constitute a rating action.

Primary Credit Analysts:Jose Coballasi, Mexico City (52) 55-5081-4414;
Leandro C Albuquerque, Sao Paulo +55 (11) 3039-9729;
Cathy C de la Torre, New York +1 (212) 438-0502;
Facundo Chiarello, Buenos Aires +54 (11) 4891-2134;
Marcus Fernandes, Sao Paulo (55) 11-3039-9743;
Antonio Zellek, CFA, Mexico City +52 (55) 5081-4484;

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