The first attempt by a Latin American issuer to tap US covered bond investors has revealed what’s needed for the region’s banks to penetrate the market: favourable market conditions and a liquid secondary mortgage market.
Last week Global Bank, the second largest Panamanian-based bank, postponed its planned $200 million rule 144A/Reg S offering under its $500 million covered bond programme.
It’s understood that investor interest was not sufficient to cover borrowing costs, but it revealed promising signs for a cross-border issuance out of the region soon.
“They did not issue a tranche as the pricing wasn’t right, but they are likely to issue a tranche sometime in the future,” said Arifa’s Julianne Canavaggio, who acted as local counsel to the underwriters and issuer. This could be either locally or internationally.
The English law-governed transaction built on the domestic bonos hipotecarios (mortgage bond) structure by including cash management and other agreements, on top of the standard trust and servicing agreements.
“We tried to make the structure as similar as possible to what the European investor are used to seeing,” Canavaggio said. There was equal investor interest from road shows in Europe and the US.
So long as the issuer’s home country permits covered bonds – either through legislation or contractually – some believe the main hurdles to LatAm offerings into the US will be non-legal.
“It’s the same structure as any market. It’s more a question of the other elements that investors are considering, in addition to the credit risk and our rating,” said Maria Muller, senior vice president of Latin America structured finance at Moody’s.
However, Howard Goldwasser, partner at K&L Gates, said the lack of a sufficiently liquid secondary mortgage market within many Latin American countries could be a hurdle.
This can prove problematic in the event of a bank insolvency when you need to sell the loans out of the cover pool to pay investors. This is particularly the case, Goldwasser said, when the maturity of the underlying mortgages are longer-dated than the bonds.
“You can legislate a structure, but, without a reliable secondary market for the underlying mortgages, you are imposing structural limits on an issuer's ability to delink its bond maturities from the cover pool's,” he said.
Despite this, Goldwasser said this and any other hurdle likely to be faced by the first LatAm issuers accessing the US markets can’t be overcome through intelligent structuring and effective legislation.
In its Latin America Securitization 2012 Outlook, Moody’s predicted that this year would see the first cross-border covered bonds out of Latin America.
The next level
Despite it being shelved, the Global Bank deal has drawn attention to the maturity of the some of the region’s covered bond markets.
Local attorneys were not surprised to see Panama and Global Bank in particular, an experienced international issuer of other debt instruments, take the lead here.
“Panamanian banks are very conservative in their mortgage lending and there’s been a lot of local investor interest for many years. So this was just taking it to the next level,” said Canavaggio.
Panama has no covered bond legislation, but local laws permit deals to be structured contractually and its domestic bonos hipotecarios market is well established. An international offering was the natural next step.
It’s also the natural next step for other LatAm countries. “Chile had a very active local market in covered bonds (letras hipotecarias) and was a major play at some point. It has decreased lately but the country still has a framework in place,” said Muller.
Elsewhere covered bond legislation and regulations are at varying stages of approval, often spurred by the need for alternative sources of housing finance for growing middle classes.
Peru and Mexico have both introduced legislation.
Moody's predicted that the first cross-border covered bonds may come to market in Mexico, where regulators are in the final stages of issuing regulations to allow for the instrument. Goldwasser also thought the first would come out of Mexico.Global Bank did not respond to IFLR’s request for comment.