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Latin America Structured Finance Outlook 2023: New Issuance Growth Expected Despite Economic Challenges

S&P Global Ratings expects Latin America structured finance issuance to increase approximately 11% to $30 billion in 2023 from $27 billion in 2022, driven by new issuance in the cross-border market (see chart 1). Our estimate also considers our forecast for Latin America GDP growth to slow significantly to 0.7% in 2023 from 3.4% in 2022, as external demand weakens, tighter financial conditions squeeze investments, and domestic demand softens after a remarkably strong performance in 2022 (see table 1).

Low economic growth combined with lack of transparency regarding fiscal policy response could generate investor uncertainty in Latin America, especially in the economies that had recent changes in government, such as Brazil. Nevertheless, we expect that the Brazilian market will continue to account for the bulk of structured finance issuance in the region, particularly through repackaged securities or corporate-backed agribusiness receivables certificates (CRAs) and mortgage-backed securities (CRIs).

In Mexico, the default of the country's largest non-banking financial institution (NBFI), poses significant challenge for the equipment asset-backed securities (ABS) sector. However, the performance of NBFI securitizations has been steady, and we believe that loan originators should be able to continue tapping the securitization market. Meanwhile, ABS issuance and collateral performance remain steady in Argentina, despite the very challenging economic environment. As a result, we have raised the maximum potential rating for some asset classes in the country.

Chart 1


Table 1

Latin America--GDP Growth And Forecasts(i)
2020 2021 2022f 2023f 2024f 2025f
Argentina (9.9) 10.4 4.6 0.5 2.3 2.0
Brazil (4.2) 4.9 2.9 0.5 2.0 2.2
Chile (6.2) 11.9 2.5 (0.4) 2.9 2.8
Colombia (7.0) 10.7 7.7 1.1 3.0 3.3
Mexico (8.2 5.0 2.6 0.8 2.0 2.3
Peru (11.0) 13.5 2.2 2.5 3.1 3.3
LatAm 6 (6.5) 6.7 3.4 0.7 2.2 2.4
(i)GDP aggregate forecasts based on purchasing power parity (PPP) GDP weights. LatAm 6--Aggregate GDP forecast for Argentina, Brazil, Chile, Colombia, Mexico, and Peru. f--Forecast. Source: S&P Global Ratings.

Overall, we believe there is potential for both new transactions and more complex securitization structures in Latin America's cross-border market, particularly assets related to infrastructure projects in the region and nonfinancial future flows. And while ratings performance was stable in 2022 and there are few ratings on CreditWatch, we will continue to monitor for potential weaknesses in credit quality and transaction performance, given the challenging macroeconomic environment. We are also maintaining our current base-case adjustments for ABS asset classes and our foreclosure frequencies for residential mortgage-backed securities (RMBS) asset classes.


Macroeconomic pressures, such as high base interest rates, inflation, and uncertain short-term economic recovery, will likely continue to pressure collateral performance in Brazil in 2023. Furthermore, the lack of clarity about the fiscal policy that the new government will adopt, as well the unknown side effects from the recent judicial recovery filling of one of Brazil's largest retailers, Americanas S.A., will likely contribute to a still cautious investor sentiment in the first quarter.

Unsecured consumer loans, credit cards, trade receivables, and corporate loans to small and medium-size enterprises (SMEs) are some asset classes that saw collateral performance deterioration in 2022. Long-term inflationary pressures and persistent high interest rates could increase the financial burden over household leverage, which is already at a record high in Brazil, and hurt the performance of assets backed by secured consumer credits and residential financings. We also expect that the high base interest rates will continue to squeeze the excess spread of long-term, fixed-rate assets, such as consumer and SME loans, which may result in negative yields for subordinated shares and consume available credit enhancement.

On the other hand, this year we will also observe the effects of two new regulations in Brazil:

  • CVM Resolution No. 175: The new regulatory framework for investment funds published by the Brazilian Securities Commission in December 2022. The changes include the ability to distribute the senior Fundo de Investimento em Direitos Creditórios (FIDCs) shares to investors, but with some restrictions. We believe this could spur new issuance growth.
  • Law 14.430/22: A legal framework of securitization in Brazil that allows the issuance of receivables certificates backed by credit rights of any segment (beyond that of the agribusiness and real estate for CRAs and CRIs). We believe this framework could amplify securitization options.
Corporate-backed CRAs and CRIs: Homebuilders and retail segments are more exposed to downside risk

The performance of corporate-backed CRAs and CRIs is driven by the credit quality of the corporate obligors. The homebuilders and retail segments are currently the most exposed to these assets' downside risks. We expect these asset classes to continue representing most of the rated Brazilian agribusiness and real estate receivables transactions issued in 2023--as has been the case for the past several years.

SME corporate loans and trade receivables: Challenging operating conditions will continue pressuring performance

We expect macroeconomic pressures to continue fueling underperformance of SMEs, ultimately resulting in comparatively high delinquency levels for SME corporate loans and trade receivables.

In 2022, tighter excess spreads on SME corporate loan transactions resulted in additional consumptions of subordinated shares as the shares' yield became negative. Some transactions even entered early amortization in late 2022 to avoid further deterioration of credit enhancements.

Unlike transactions that have a short revolving time, trade receivables transactions are not as susceptible to negative carry pressures and their overall performance deterioration has been significantly lower than that of SME corporate loans. Trade receivables transactions also continue to benefit from conservative minimum credit enhancement levels and active management (by consultants and managers) to prevent rapid pool deterioration through more stringent origination policies.

Real estate securitization (CMBS and RMBS): Performance still stable, but short-term challenges could hurt performance

Brazilian commercial mortgage-backed securities (CMBS) transactions experienced a recovery in 2022, and we expect prime commercial properties to maintain adequate operational performance this year. However, we believe nonprime properties will continue to face difficulties as property managers try to increase occupancy rates and rent levels amid challenging conditions for small businesses and retailers.

We also believe transactions backed by home equity loans will likely continue trending in 2023, despite challenging market conditions. And although we do not expect significant deterioration in residential loans and financing performance, macroeconomic uncertainties will likely lead to lower prepayment levels and increasing renegotiation requests, which could pressure transaction performance.

Consumer loans and credit cards: Delinquencies will likely increase

Delinquency levels rose for unsecured consumer loans and credit card transactions in the second half of 2022. This reflected the impact higher household indebtedness from the pandemic, the sharp hike in interest rates in fourth-quarter 2021 through first-quarter 2022, and rising inflation had on obligors' available income and debt service capacity.

However, we expect these assets' performance to stabilize in first-quarter 2023 because the servicers have adjusted their origination standards and have been more conservative. Nonetheless, lower GDP growth and uncertainties around the interest rate path could raise delinquency levels. And while conservative credit enhancement levels have protected senior shares, losses and interest rate mismatch have affected subordinated shares return.

We expect transactions backed by pension and payroll deductibles and auto loans to remain fairly stable in 2023--as they have in recent years. Despite the recent squeeze in excess spreads due these assets' long-term nature, overall losses remain below our base-case scenario.


Mexican structured finance new issuance volume could pick up and reach $1.0 billion by year-end 2023, led by equipment-backed commercial ABS transactions from NBFIs and some other consumer-related ABS. Last year's new issuance volume disappointed with only 12 transactions totaling $0.5 billion (mainly led by equipment ABS securitizations), compared with 16 transactions totaling $1.3 billion in 2021 and nine transactions totaling $1.2 billion in 2020. We believe this contraction mainly reflects the challenging financing conditions Mexican NBFIs have been experiencing since the start of the pandemic and the negative impact that the defaults of certain large industry players have had on investor sentiment.

ABS: High credit enhancement levels will continue to support current ratings

We believe the challenging financing conditions Mexican NBFIs have been experiencing will continue to hinder the Mexican ABS sector. However, we also expect that the credit enhancement levels for NBFI transactions will remain steady and provide stable protection in 2023, even though high inflation could hamper obligors' payment capacity and lead to increased delinquencies.

Most of the Mexican ABS transactions we rate are backed by equipment loans and leases, and the majority will remain in their revolving period in 2023. Therefore, although we do not expect ABS overcollateralization ratios to increase in the near term, we believe their credit enhancement levels will continue to support the current ratings (see chart 2). For instance, credit enhancement levels for equipment ABS transactions rose slightly, on average, to 1.36x in November 2022 from 1.35x a year earlier.

We also expect the performance of equipment ABS transactions will remain stable in 2023, even though high inflation levels, a slower economic recovery, and weakened employment levels could lead to increased delinquencies and defaults.

Chart 2


RMBS: Government agency transactions are showing resilience

Mexican government agencies Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) and Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (Fovissste) both saw transaction performance deterioration in 2022, fueled by the challenging economic conditions during the past two years. However, Infonavit saw the largest deterioration, and Fovissste's overall performance was stronger even though it declined throughout the year.

We expect the credit quality of Mexican RMBS will remain stable in 2023. This reflects our view that some Infonavit transactions (especially those with target overcollateralization structures) could activate their performance-related early amortization triggers, which in turn could cause the transactions' payment structures to shift to full-turbo from pro rata and stop the interest payments to the mezzanine classes. From a cash flow analysis perspective, this could rapidly deleverage the portfolios and increase their overcollateralization.

We forecast nonperforming loan (NPL) issuance could rise to 15.0%-16.0% (from 14.0% in 2022) for Infonavit and to 12.0%-13.0% (from 11.3%) for Fovissste by year-end 2023. We expect that NPL transactions will maintain solid credit enhancement metrics, as they continue to build overcollateralization due to their full-turbo amortization schemes. We also believe the available credit enhancements for the NPL transactions we rate are still sufficient to withstand our stress scenarios commensurate with the current ratings. We will continue to monitor the transactions' performance, as well as inflation metrics because they could hamper available household income and portfolio performance, and take rating actions as we deem necessary.

NBFI transactions continued to show mixed results in 2022. Although most inflation-linked unit (UDI)-denominated transactions saw significant performance deterioration, we also raised our ratings on some classes due to improved performance. (NBFI transactions also saw severe deterioration after the 2008-2009 financial crisis, and their credit enhancement continued to decrease due to higher-than-average defaults, negative excess spread, and low recoveries.) In addition, the Mexican peso-denominated transactions continued to show solid performance, with stable defaults, collection levels, and overcollateralization metrics increasing as they amortized.

Unlike other market participants within the Mexican RMBS sector, Fideicomiso Hipotecario (FHipo) transactions' performance has remained stable, with defaults below 1.0%--which is in line with our expectations


We believe weakening economic conditions will challenge issuance in Argentina. In 2022, new issuance totaled $1.2 billion--the highest level since 2019. However, high interest rates, persistently high inflation, and political uncertainty stemming from disagreements on policy within the ruling coalition and the primary (PASO), as well as from national elections, could dampen issuance growth this year.

We expect last year's trend toward concentration both in terms of issuers and asset classes to continue this year. Issuance will most likely be driven by few frequent issuers with a strong position in the consumer sector, while transactions backed by trade receivables and agribusiness-related deals could increase in the local market. However, as long as interest rates remain high amid challenging inflation dynamics, increased funding costs of securitization and a modest origination pace may slow issuance and discourage the entrance of new participants while originators adjust the interest rate charged to customers.

In 2023, we expect increased credit enhancement for most amortizing transactions and collateral performance to remain relatively stable. We believe originators and servicers will continue monitoring their underwriting policies and collection processes to avoid a rapid decline in the credit pools if macroeconomic conditions deteriorate further. Inflation, which is likely to stay above 90% this year, could continue affecting household purchasing power but have a positive effect on amortizing consumer and personal loans for borrowers--as long as unemployment doesn't worsen beyond current expectations.

However, the weakening economic conditions present downside risks to the loan servicers' financial position and could hurt their servicing processes, which may lead to negative rating actions. Limited funding sources and weak internal controls and corporate governance also pose key risks to the servicers' operational capabilities. Because although these portfolios usually require intensive servicing, the servicers cannot be replaced without material cash flow disruptions.

From the investor side, there's still an appetite for securitized products, with a clear preference for U.S. dollar- or inflation-linked ones, as well as intentional moves to diversifying away from government-related and central bank debt.

Payroll and personal loans: Modest growth expected in 2023

We expect payroll loans, which are deducted before salaries are deposited into public employees' and retirees' accounts, will continue showing stable performance. This reflects our view that payroll loans have lower collateral performance sensitivity to inflation and unemployment compared to other asset classes, based on the periodic salary adjustments, which are generally in line with inflation, and the historically low employee turnover in the public sector. We also expect payroll loans origination volume to grow because the rates charged to new borrowers are based on market rates and will likely be (at best) in line with inflation this year.

We also expect the number of personal loans with voluntary repayment to increase in 2023, as originations rise in the ecommerce and fintech industries. Overall delinquency levels will likely remain high, and a sudden deterioration of key variables such as unemployment, inflation, or market activity levels could increase defaults.

Regional credit cards: Controlled expansion with a focus on loss rates

We expect Argentinean regional credit card companies to increase origination volume this year while keeping loss rates at manageable levels in a challenging macroenvironment. During the past two years, the regional credit card companies have generally kept loss losses under control while originating to clients with extensive track records, which limited portfolio growth. Many of these companies are also now expanding their businesses and resuming projects that were postponed during the pandemic and are intended to broaden their client base and improve collections figures.

This report does not constitute a rating action.

Primary Credit Analyst:Jose Coballasi, Mexico City + 52 55 5081 4414;
Secondary Contacts:Marcus Fernandes, Sao Paulo + 55 (11) 30399743;
Victor H Nomiyama, CFA, Sao Paulo + 55 11 3039 9764;
Antonio Zellek, CFA, Mexico City + 52 55 5081 4484;
Tomas Benzaquen, Buenos Aires + 54 11 4891 2164;
Daniela Ragatuso, Mexico City +525550814437;
Alejandra Rodriguez, Mexico City +52 5550814460;
Analytical Manager:Leandro C Albuquerque, Sao Paulo + 1 (212) 438 9729;

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