Securities backed by credit card transactions that haven't happened yet in Mexico might strike some as a tough sell, but financiers are devising ways to make these deals attractive to cautious investors.
Recently, Nesbitt Burns Securities Inc. and Citicorp closed securities that are backed by future credit card-related bills owed to Mexican banks.
Emerging market securitizations such as these are normally for investors with deep pockets or strong stomachs. But credit-rating agencies graded both deals AAA, chiefly because the offerings were insured against default by Capital Markets Assurance Corp.
Latin America is one of the hottest areas in the growing securitization market, and many American banks that 10 years ago were taking losses on loans in these countries are now busily trying to arrange securitizations for newly privatized companies seeking capital.
These deals shift the payment risk from banks to insurance companies and asset management firms that invest in them.
As these offerings come to market more regularly, investors say they expect more Latin American companies will have to ante up for insurance.
"People get nervous about these deals because there's no history of payments," said Robert Wang, portfolio manager at Bankers Trust New York Corp.'s global investment management unit, which has $70 billion of assets under management. "When they develop a history, people won't need the guarantee."
One of the Mexican credit card securitizations involved Bancomer. The $200 million deal was led by Nesbitt Burns, a U.S. affiliate of Bank of Montreal, which owns 16% of Bancomer.
PAR Capital, a commercial paper conduit sponsored by Nesbitt Burns, bought the entire package.
The other deal involved Banamex. Officials at Citibank, which led the deal, declined to offer details.
American banks frequently sell credit card receivables on their books to investors for slightly higher yields than Treasuries. But Bancomer's credit card offering is a "future flow" deal. In other words, the transactions haven't yet been transacted.
Because of the risk in other Latin American future-flow deals, such securities often offer investors yields up to 200 basis points higher than Treasuries with comparable maturities.
But the insured securitization from Bancomer offered much lower risk and much lower return - only 30 points above the three-month London interbank offered rate.
"These would likely be B-rated deals without the guarantees," said Eric Rosensweig, vice president at CAPMAC, the credit guarantor. He said the yields of insured deals are so much lower that issuers can realize "a pretty significant savings" by paying up front for the guarantees.
The assets in both securitizations are expected to come from tourists and other visitors using American credit cards to pay for hotel rooms, airline tickets, and other amenities from Mexican companies who use Bancomer or Banamex.
After MasterCard or Visa receive payment for these purchases, they transfer the dollars to a master trust. Bancomer and Banamex then receive the dollars from the trust, enabling them to pay off the investors.
This complex process "is designed to mitigate transfer and convertibility risk," Mr. Rosensweig said.
Despite the high grades credit-rating agencies awarded the Bancomer and Banamex offerings, Mr. Wang of Bankers Trust said he is still wary of such deals, calling them "a little exotic for my taste."