Latin American securitisation thrives

Securitisation in the Latin American market has grown over the past five years, but the market is still in its infancy, according to the latest Bank for International Settlements (BIS) quarterly review.

The report, published yesterday, stated that structured transactions have expanded rapidly in Latin America since 2003. The amount of new securitised transactions in the region reached $20 billion in 2006, up from $6 billion in 2002. Of the 2006 total, more than $16 billion represented issues in local markets, while transactions in the cross-border market amounted to $3.6 billion.

A more stable macroeconomic environment coupled with legislative changes has been the main factor behind this expansion, according to Michela Scatigna, acting economist for BIS, and Camilo Tovar, economist for BIS, both based in Mexico City. They wrote: “Despite the growth in securitisation, the Latin American market remains in its infancy, as reflected in the size and type of assets involved in transactions.”

Securitisation in Latin America has already helped to enhance the liquidity of domestic residential mortgages and consumer loans, which is similar to the experience in other regions of the world, such as Asia, according to Scatigna and Tovar.

They wrote that securitisation can offer benefits to the region, such as consolidating the development of domestic financial markets and improving their resilience. However, the report also highlights a number of associated risks with development of asset securitisation in the region. These include: the difficulties in assessing the credit risk of structured products due to their complexity; conflicts of interest associated with rating agencies; and prepayment risk and the interest rate denomination of securities.

The BIS report stated that, between the end of May and August 24, global credit markets experienced “considerable volatility” due to uncertainties about size and distribution of losses from US subprime mortgage exposures. This caused spreads to widen: the US five-year CDX high-yield index rose by 270 basis points to around 525, while the corresponding US investment-grade index widened by 45 basis points to a high of 81 in early August. In Europe, the five-year iTraxx Crossover CDS index climbed by 280 basis points to 471 in late July, while the headline iTraxx Europe investment-grade index increased by 48 basis points to a high of 68. The report also stated that emerging market equities and bonds, however, were resilient through most of the period, reflecting broadly favourable economic conditions.

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