Silverado Asset-Backed Securities: Fraud & Deceit in the Brazilian ABS Market

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Investors lost over R$400 million in the failure of Silverado’s two main ABS securities, called Fundo de Investimento em Direitos Creditórios (FIDC).  Latin America Structured Finance has written this article to inform credit investors about the unique risks posed by the Brazilian credit markets, especially the market for FIDCs.

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Trendbank Abandons R$400 million ABS

Trendbank Multisetorial investors in for a rough rid


Click on the link below to read the entire article

LASFA Trendbank Article Final

This is the first of two articles discussing Trendbank’s decision to abandon its FIDC (Brazilian ABS) that was collateralized by factoring receivables and other types of business debt.  As we discuss in the article, rapidly growing defaults in the ABS forced the company to make the not unheard of decisions to fire 300 of its 360 employees (most of whom worked in the servicing area), move the company’s offices, and call an investor meeting to announce it all.  Austin Rating seemed surprised; the Brazilian rating agency lowered the ratings 11 stops from AA-(Brazil) to B(Brazil) after reaffirming the AA- rating in May 2013. Planner Corretora, the administrator, also seemed be caught by surprise.  This seems strange given that Trendbank fired so many people and moved the company headquarters, which were a mere ten blocks from Planner’s headquarters.  The saddest part of the entire story is that investors should have seen this coming two years ago.


Our latest Journal of Structured Finance Article: “Pricing Brazilian ABS to Trade in the Secondary Market: Benefits from Assimilating Best Pricing Practices”

Here is the link to the Journal of Structured Finance Article

Brazilian asset-backed securities (ABS) appeal to investors because of their relatively high yields and diversification benefits. However, Brazilian and international investors struggle to price these ABS because of the country’s unique financial calculations, lack of transparency, and the scarcity of quantitative pricing tools in Brazil.

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The Journal of Structured Finance just published our paper “Analyzing Brazilian ABS: FIDCs”

Here is the link to the Journal of Structured Finance Article

The paper demonstrates the value of using financial models to reverse-engineer deals as is done in the U.S markets. We look at various aspects of risk and performance through the model’s lens. The evaluation compares and contrasts two FIDCs: FIDC Panamericano Veículos I and Omni IV. We discuss how the structure of the deal can dramatically affect the value of the FIDC; even when the structures have simple waterfalls typically seen in Brazilian FIDCs. We further demonstrate how Omni’s structure allowed it to weather the 2008 crisis and emerge in better shape than the Panamericano FIDC. In addition, we show how Banco Panamericano was using the FIDC to remove bad loans from its balance sheet.

Here is the link to the Journal of Structured Finance Article

Defaults in São Paulo in April are highest since 2007, says FecomercioSP

We feel that this article provides some important measures of the deteriorating credit conditions in Brazil. We are especially concerned about debt service coverage ratios in the country.  Many analysts try to compare debt owed to income or debt to GDP in Brazil to other countries.  However, we believe that the extraordinarily high interest rates in Brazil render this comparison almost useless. It is more consistent to use debt service coverage, the percent of Read More…

Defaults Should Brake Credit Growth Even with Lower Interest Rates, says Serasa

We recently wrote a piece, entitled Mantega Magic:  Opportunities for Brazilian ABS, that explored the expected negative consequences of the federal government’s program to use the balance sheets of public banks to reduce credit spreads for loans in Brazil.  Our main concern was that the public banks would not be able to replace the reduction in credit from the private banks.  This article, which we have translated from Valor Econômico, reports that Brazilian Read More…

Is the Market for Brazilian Real Estate Investment Funds Cooling Off?

The growth in the market for Brazilian Real Estate Investment Funds (Fundos de Investimento Imobiliário – FIIs) and Mortgage-backed Securities (Certificates of Real Estate Receivables – Certificado de Recebíveis Imobiliários – CRIs) over the past few years has been phenomenal by any measure.  While a FII is most often compared to a Real Estate Investment Trust in the United States, it is legally an investment fund and fundamentally Read More…

At What Height Does A Seawall Protect From A Tsunami?

Brazilian bank analysts are trying to convince you that their country is not experiencing a consumer credit bubble. They see the possibility of a full-blown crisis as remote.  However, the very statistics they cite -high bank reserves- make us worry.  Banks may be beefing up their reserves because they fear high levels of non-performing loans (NPLs) from consumer debt.  We are particularly concerned about the vulnerability of non-bank Read More…

Brazil Credit Review Second Quarter 2011

Review of Brazilian Credit Markets Second Quarter 2011

Report Summary

For a full report, download here

  • April 5th, Fitch upgraded Brazil from BBB- to BBB. Fitch praised newly elected President Rousseff’s efforts to control spending and address inflation concerns.
  • On June 20th, Moody’s upgraded Brazil’s sovereign to Baa2 from Baa3. As reported by Dow Jones, based on an interview with Moody’s Mauro Leos, the agency feels that the country is pledged to fiscal responsibility. Leos also pointed out that the country will face a strong currency for the foreseeable future and the country needs to control spending and contain recent worrisome increases in inflation.
  • Many analysts have expressed concerns with Brazil’s financial situation. They cite the lack of investment and dependence on exports of commodities to finance a voracious appetite for imports.
  • The level of debt to GDP hit 47% and Brazilian consumers spend on average about 25% of their income to finance their debt load: this compares to a debt load of 16% of income per person in the United States.
  • According to Central Bank of Brazil data, issuance of consumer credit grew 15.3% for the year ended June 2011 and outstanding balances grew 22.46% for the same period. Outstanding balances of consumer vehicle loans grew 42.1% over the past year.
  • Payments over ninety days past due climbed to 26.3% of the balance for credit card portfolios and 13.2% of the balances on loans for purchases goods at stores (credit issued by the stores).
  • Serasa/Experian’s measure of late payments on consumer debt issued by non-bank finance companies is growing dramatically.
  • LatAm Structured Finance’s macroeconomic model to predict the level of non-performing loans in bank portfolios is predicting a 50% increase in non-performing consumer debt and a 65% increase in non-performing business debt in the first half of 2012 if economic growth (as measured by industrial production) does not grow over the period.
  • Credit quality on business loans is stable for the time being, but showing some signs of weakness.
  • Brazilian banks have strong balance sheets, but can they hold off contagion from a small piece of the debt market that is likely to experience very high default rates.

For a full report, download here