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Structured Credit Operations in Brazil

When the Pan-American Surety Association held its 15th International Seminar in Capetown South Africa, Eduardo Machado, a member of the Advisory Council of Brazil's UBF Garantías y Seguros S.A. talked about structured credit operations in that country.

In Brazil, there is a window of opportunity, for a number of different reasons, for the development of a business based on credit and financial guarantees in relation to structured financing operations.
The Brazilian macro-economic outlook has experienced critical changes, as reflected in the graph below.


- Lower interest rates and the perception of increased stability in the Brazilian economy have combined to create the conditions for the structuring of debt instruments on the domestic market to finance transactions within this country.
- For the first time in decades, it is now possible to use local capital to finance a variety of investment projects in Brazil at a lower rate than for average yields and without the debt level that has been typical for projects of this kind.
- The stability of domestic fixed yield markets has created a need for asset managers to find longer-term fixed yield instruments, thus increasing demand for this type of securities. As a result, pension management funds, insurers and asset management firms currently cannot satisfy their demand for national debt instruments.
- A new institutional scenario has come to the fore, with a whole new set of regulations that have laid the groundwork for the development of a securitization market in Brazil: the country's SFI Law, governing fixed assets (real estate), and its Financial Securitization Law, covering all other markets, such as commercial loans, credit cards, automobile loans, etc.
- Institutional investors such as pension funds, insurance companies and fixed-yield asset managers are now subject to stricter regulations in terms of rating. This increases the value of credit and financial backing.
These conditions not only indicate the existence of an opportunity to develop credit and financial guarantees in Brazil, but also transmit a sense of urgency when it comes to entering this market. Those who move swiftly will be in a position to choose the best, the most profitable and the least risky operations. They will be able to set precedents and consolidate their market share within a growth framework. And such ideal conditions are bound to change as the competition increases.
In order to provide and idea of what is possible regarding the improvement of the quality level of structured operations in Brazil, here are two examples:
1- Securitization of Credit Portfolios:
- Credit backing would cover potential non-compliance of physical persons. This kind of credit backing permits sale of these loans outstanding to a securitization company, which would, in turn, issue a bond to finance the operation.
- Underwriting of this operation is based on pre-selection of credit and portfolio performance (payment) background, be it backed or not by some additional type of guarantee offered by the originator.
2- Project Financing Guarantee:
- The financing guarantee covers cancellation of funds used to carry out a given project-financing operation that is sponsored by a high-level credit insurance company. Underwriting is based on three key factors:
- Insulation of the project within a vehicle free of bankruptcy hazards.
- Full remedies against the sponsor.
- Performance guarantee on the construction contract.

Translation: Dan Newland

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