Originators in Latin America often turn to cross-border structured finance issuance to expand their potential investor bases, and also to obtain more competitive yields relative to their unsecured financing. Even though the U.S. Federal Reserve Bank (the Fed) is expected to cut its benchmark rate this year, money remains expensive in domestic and cross-border markets. Nonetheless, cross-border securitization in Latin America in the form of repackaged transactions (repacks) should continue to reduce risk premiums associated with construction and operating risks. In this context, financial and nonfinancial future flows, particularly exports, also offer an alternative for commodity producers and other originators in the region to raise debt at a reduced cost. In addition to reviewing S&P Global Ratings' portfolio of rated transactions, this primer describes a comprehensive guide to some of the popular emerging and longstanding securitizations in the Latin America cross-border market.

Chart 1 shows characteristics of our rated portfolio of Latin American cross-border securitizations.

Chart 1

Emerging And Longstanding Securitization Structure Vehicles In The Cross-Border Market

Cross-border issuance has been focused on tailor-made transactions that have arisen from specific market opportunities. Most of these have been one-off transactions taking advantage of mature and proven structures that can be fully customized to securitize a wide spectrum of assets (see table 1). Historically, these structures have provided a platform to access investors in international debt markets, required for issues that may be too large for any domestic market in the region. In addition, during the last few years, we have seen many of these transactions tackling the private markets.

Table 1

S&P Global Ratings' Cross-Border Portfolio Overview

S&P Global Ratings currently rates 21 cross-border transactions with assets domiciled in Latin America (see table 2). These include: nine repacks related to the financing of infrastructure projects in the region, eight repacks related to other financial instruments, one consumer ABS transaction, one future flow, one retranching structure of a residential mortgage-backed securities (RMBS) transaction, and one covered loan.

Table 2

We describe in detail the different types of Latin American securitizations in our rated portfolio in the follow sections.

Consumer ABS

Our cross-border portfolio includes one ABS transaction backed by unsecured personal loan receivables originated in four different jurisdictions (Aruba, Curaçao, Bonaire, and Panama) by companies from Caribbean Financial Group (CFG) Holdings Ltd. The ratings on the A, B, C and D notes from this transaction reflect our view of the transaction's credit enhancement, collateral characteristics, and legal structure, among other factors.

Repacks

Repack structures have been frequently used in Latin America for financing infrastructure projects by repackaging payment obligations issued by the government or by government-related entities (GREs). We have also observed repacks backed by other types of financial instruments, such as bonds and repurchase agreements, as a way to monetize different types of receivables.

Infrastructure repacks 

Infrastructure repacks consist of construction payment obligations issued by governments or GREs to finance a variety of infrastructure projects in Latin America, such as the construction of highways and metro lines. The transactions in our portfolio are backed by: Certificados de Reconocimiento de Obligación de Pago (CROPs) and Pagos Diferidos de Inversión (PDIs) for which we view its credit quality at the same level of our sovereign foreign currency rating on Paraguay, and Certificados de Reconocimiento de Derechos del Pago Anual por Obras (CRPAOs), Retribución por Inversión - Certificado de Avance de Obras (RPI-CAOs) and Informes de Progreso de Trabajo (IPTs) whose credit quality we view as one notch below our sovereign foreign currency rating on Peru and Panama, respectively. The ratings on these transactions primarily reflect our view of the underlying security's creditworthiness, which is linked to each sovereign credit rating.

Other repacks 

Repacks can also be backed by other types of financial instruments. Our cross-border portfolio includes transactions with the underlying assets detailed in table 3.

Table 3

Future flows

We currently rate two series from Rio Oil Finance Trust, a securitization of all current and future royalty and special participation payments arising from offshore oil and natural gas production in the Rio de Janeiro state in Brazil. The ratings primarily reflect our view of the corporate performance assessment of Petroleo Brasileiro S.A. (Petrobras) as the originator, the strength of the transaction's cash flow through a debt service coverage ratio (DSCR) analysis, and a sovereign interference risk assessment that limits the ratings on the transaction at the level of the issuer credit rating on Petrobras given that, as a GRE, its rating already captures certain risks associated with federal government influences, such as its domestic pricing strategy. In addition, under a stressed scenario, changes to laws and regulations governing the distribution of oil and gas royalties and special participations are likely since these resources are crucial for the fiscal balance of certain states and municipalities.

Retranching structures

In a retrenching structure, existing structured finance instruments (the underlying security) are placed into a bankruptcy-remote, special-purpose entity (the issuer), which then issues one or more classes of securities that are credit-tranched usually to achieve a better credit risk profile for the senior retranching than for the underlying security (see "Global Methodology For Rating Retranchings Of ABS, CMBS, And RMBS," published Aug. 1, 2016). Our cross-border portfolio includes La Hipotecaria Panamanian Mortgage Trust, which is a retranching structure of Sixteenth Mortgage-Backed Notes Trust's series A (an RMBS transaction issued in Panama). In our view, the repayment of the retranching depends entirely on the repayment of the series A notes.

Covered bonds

Our cross-border portfolio also includes two tranches of a loan facility that was granted by a group of lenders to Global Bank Corp., which is backed by a pool of personal loans granted to retirees and pensioners from the Caja del Seguro Social (CSS) in Panama. Since there is no specific covered bond regulation in Panama, the transaction documents set out the legal framework for the covered loan. The ratings are two notches above the rating on Global Bank Corp., reflecting the dual recourse nature of the transaction and the credit enhancement, which are sufficient to withstand the defined stress scenarios.

Stable Performance Of Underlying Assets, Yet Sovereign Pressure Persists

We do not expect major changes in performance of the transactions we rate over the next 12 months. All of them have been making debt service payments according to schedule, and the underlying assets have been performing as expected (see chart 1). However, most of the transactions in our portfolio are also dependent on the rating of the relevant sovereign or GREs. Over the past 12 months, S&P Global Ratings has taken positive rating actions on Brazil, Paraguay, and Uruguay, and affirmed the ratings on Chile, Ecuador, Mexico, Panama, and Peru.

On the other hand, the ratings on Chile, Ecuador, Panama, and Peru have a negative outlook, which could pose downside risks to 12 of the 21 cross-border deals we rate in the region. Potential rating actions in this direction would likely affect ratings on key counterparties such as letter of credit (LOC) providers, bank accounts and/or swap providers (absent any downgrade remedy), and/or change our view of the underlying assets' credit quality, which would in turn impact ratings on the structured finance deals in our portfolio.

Nonetheless, the underlying assets from the outstanding transactions are domiciled in countries whose sovereign ratings are at the high end of the range within the region. Thus, many jurisdictions in Latin America with low sovereign ratings have shown minimal activity in the cross-border market, which reflects the dependency that these types of deals have to the sovereign rating, either directly or indirectly through a relevant counterparty. In this context, reaching long-term economic growth, effective policy making, maintaining political stability, and building stronger institutional frameworks in Latin American countries, all continue to represent challenges for cross-border market growth.