Banks are joining insurance companies and pension funds as buyers in the fledgling market for asset-backed securities from emerging nations.
"Commercial banks are having a tremendous appetite for buying these instruments," said Fernando Guerrero, who puts together emerging market offerings at BT Securities Corp., the investment banking arm of Bankers Trust New York Corp. He declined to name banks, but said they have been investing in unrated deals with little collateral to support them.
About $8 billion of asset-backed securities have been orignated in Latin America and other developing regions this year. Such issues are gaining in popularity because they carry yields of 200 basis points or more over the London interbank offering rate.
Unlike American securitizations, in which companies offer investors a stake in income-producing assets, many unrated Latin American deals are backed by "future flows" - from assets companies have not yet sold or manufactured. "In this sense, the deals are more like loans than securitizations," said Thomas McCormick, managing director at Financial Security Assurance, a company that insures the securities.
Investment banks have begun offering future flow deals more often in recent years as Latin American governments privatize industries and companies seek capital.
Dealers say the risks in the future-flow deals are limited; the offerings are often small - $200 million or less - and short in duration. Timothy Hall, managing director at ING Baring Securities Inc., said investors are reluctant to buy anything that lasts longer than four years.
Deals are also structured to mitigate risks. They are in American dollars to protect against foreign currency rate changes.
Investors said that despite instability in some countries, no asset- backed security from an emerging market has "defaulted" although payment on some deals has been delayed.
Investors speaking at a conference on global securitization this week in Miami said their experiences with Latin American securitizations have been positive.
But David Gold, investment manager at Transamerica Life Insurance Co., said his firm usually declines emerging market securities, because there are plenty of high-risk, high-yield deals originated in the U.S. The only exception, he said, was an investment in receivables from tequila-maker Jose Cuervo.
John Lapham, managing director at SunAmerica Corporate Finance, an annuity group, said he has invested cautiously - limiting his international security stakes to $281 million, or less than 2% of SunAmerica's assets.
Mr. Lapham said it remains to be seen how risky the deals are. Since securitization took off, the Latin American economy has been solid, so no one really knows what could happen to the deals in a downturn. "We're whistling past the graveyard if we think problems couldn't develop," he said.