Joao Garcia BMB 2010 Presentation

Brasil Means Business, Amsterdam, Mar 29th 2010

Investing in Brazilian Securitization Instruments

João Garcia1, Serge Goossens2, Hebert Kimura4, Lucas Neto5

Jacob Perera3

1Sacred Heart University, Rue Alcide de Gasperi 7, Chambre de Commerce, L2981Luxembourg ([email protected]) 2Senior Quantitative Analyst, Treasury and

Financial Markets, Dexia Bank ([email protected]) 3Professor Titular, Dep. ofEconomy 4Professor Adjunto, Dep. of Economy 5Ph.D. Candidate, Dep. of Economy

Universidade Presbiteriana Mackenzie São Paulo, Brasil

The opinions expressed here are those of the authors and do not necessarily represent those of DEXIA neither Mackenzie

University.

Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)Securitization in Brazil Mar 29th 2010 1 / 21

Main Characteristics

Half the Brazilian market is exposed to materials and energyRanked 75th on Transparency International’s CorruptionPerceptions Index

From the BRICS we have: China (79th), India (84) and Russia(146th)

Population of about 200mAverage return of 19.9% per year in the last 10 years

MSCI EM : 10.1% per yearMSCI World: 0.2% p.a.

Market capitalisation 1.3 trillion USDSecond largest for EM

40% of Brazilian Equity Index: Vale do Rio Doce (mining) andPetrobras (oil)


Main Characteristics

Potencial booming consumer marketBrazilian incomes will rise and so will consumer spending

White goods, autos and propertyLowest ever interest rates

Credit and consumer spending will increase enormouslyRecent discovered deep sea huge oil fields set to become a majorinvestment attractor

Oil income will be in the coming years / decades a boost to thecountry industryIt has the potential to contribute enormously its rise as animportant economic power.Possibilities of investments in stocks and shares, energy,agriculture or Brazilian real estateWorld Travel and Tourism Council (WTTC) estimates:

2010: Growth of 5.9% of GDPExpected Annual growth (next 10 years): around 5.6%.


Housing in Brazil

Acceleration Growth Program / Programa de Aceleração deCrescimento

Government Program: My Home, My Life Phase 1City Ministry Resolution 141Time Horizon 2010Gov. Subside 34 bi BRe / 14 bi Eur / 19 bi USDCaixa Economica Federal (FGTS)Goal: Financing 1 mi houses for low income population

Government Program: My Home, My Life Phase 2City Ministry Resolution 141Time Horizon 2010Gov. Subside 48-72 bi BRe / 20-30 bi Eur / 27-40 bi USDCaixa Economica Federal (FGTS)Goal: Financing 3 mi houses for low income population


Securitization and Capital: Originator Point of View

Probability

Loss

Loss Distribution

Probability

Loss

Loss Distribution

ECAP

EL

Stays in the Bank

Investors

Securitization

1Probability

Loss Distribution

22

1

2

Less ECAP

Business Strategy

Before Heavily Investedin Bonds

AfterHeavily Invested in Securitization instruments

Bank A

Download single nameinstrument…

Upload multi nameinstrument…

Logic: Less RC and ECAP

Loss

ECAP

Focus on Business OriginationMinimal concern with managing a portfolio of loans

Insentive: Economy of ScaleReduction in costsHigher Efficiency in the use of capital


Securitization and the Economy

Assume one invests in houses, say 10 houses

Impact on economic activity is the one of only 10 housesConstruction companiesReal state rental and vendorsHousing AccessoriesBanks and other financial companies

One delay on rental payments is immediately seen by the investor


Securitization and the Economy

Assume one securitizes the cash flow of the houses

Positive impact on economic activity is the one of 1000 housesConstruction Companies build more housesThere are more houses to rent and sellMore housing accessoires are soldIncrease in banking and financial activity

Houses became more affordable!Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)Securitization in Brazil Mar 29th 2010 7 / 21

Securitization: the Investor Perspective

Portfolio 1: Two Large Positions

Portfolio 2: Several Small Positions

Markowitz and Portfolio Management

Assumptions (CAPM based):A portfolio manager is better off with Systematic than withIdiosyncratic risk.Substituting single name to multiname exposure increases returnand efficiency in the use of capital.


Securitization: the Investor Perspective

Bonds, Loans, ABSs

Collateral

Securitization

ABS Notes

Ris

k In

crea

ses

• The Securitization technology transfers back to the market assets that otherwise would remain illiquid in the portfolios of companies.

• Investors can take systemic risk at different points of the capital structure

• CAPM supports the investment strategy

• Substituting single for multiname exposure increases return and efficiencyIn the use of capital.

What went wrong then?Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)Securitization in Brazil Mar 29th 2010 9 / 21

Brazil and Securitization

Why is it necessary?Insentive 1: Country is rich in commidities

Agribusiness (e.g. sugar, coffie, cocoa, soja)Iron ore, steelOil: recent discovered huge deep sea reserves

Insentive 2: Important forthcoming world eye catching eventsEvent 1: World Cup 2014Event 2: Summer Olympic Games 2016Events (1 + 2) implication:

Enormous investiments in infra-structure:


Brazil and Securitization

Construction related Jobs consequences:An enormous increase in consumption

Housing apparelsIkea like companies

Financials:MortgagesCredit card and auto loans

Transportation companiesAir planes, trucks, busses

Turism realated companiesHotels and restaurants


Brazil: Securitization Milestones

Mesbla 1992: Credit card receivablesMappin 1995: Client receivablesBompreço 1996: credit card receivablesCibrasec 1999: Real estate securitization


Brazil: Securitization Milestones

Two majors Securitization instrumentsCRIs: Certificate of Real Estate ReceivablesFIDCs: Receivables Investment Funds


Real Estate and Securitization

CRIs: similar to Mortgage Backed SecuritiesColateral: real estate receivables (residential or commercial)Tranches: senior or juniorInterest may be fixed or floating

Indexed to Brazilian price indecesIGPM: reflects prices in generalIPCA: linked to consumer pricesIt may not be indexed to foreign currencies

Payments of interest and / or principal usually monthlySingle payment at maturity is possible


Asset Backed Securities

FIDCs: Receivables Investment FundsStructured investment vehicles

Pool of receivables originated by one or multiple sellersReceivables:

Any kind of credit rightsOriginated from operations in the commercial, industrial, servicesor financial sectors

Receivables can be performed or future flowOpen or closed-ended fundsSenior, subordinated and mezzanine classes / tranchesA FIDC can have several issues, of different terms of durationInterests can be fixed or floating

Usually indexed to SELIC, Brazilian Fed fundsIndexation to foreign currencies is not allowed


Brazil: Securitization and Sectors

Distribution of Securitization per Economic Activity of IssuerSource: Uqbar - www.uqbar.com.br

Sector Amount (BRe) (%)Financial Intermediation 7,112,263,054 58.4

Multisegment 2,361,016,707 19.4Transformation Industry 1,510,665,510 12.4

Commerce 414,837,682 3.4Eletricity, gas and water 370,031,201 3.0

Services 173,980,225 1.4Construction 88,958,477 0.7

Agriculture and Pecuary 73,237,107 0.6Telecomunications 43,348,000 0.4

N.A. 28,071,292 0.2Education 9,420,000 0.1

Insurance and Previdence Complementar 1,250,000 0.0Pessoa Física 1,000,000 0.0

Total 12,188,079,255 100.0


FIDC and Collateral Composition

FIDC Collateral composition for the years 2008 and 2009It does not include the Petrobras FIDCsSource: Uqbar - www.uqbar.com.br

2008 (%) 2009 (%) 2008 (BRe) 2009 (BRe)Tributos 0.6 0.0 100,000,000 0Direitos 0.0 0.0 0 1,000,000

Títulos Mobiliários 0.3 0.2 52,152,346 23,131,427Recebíveis do Agronegócio 2.8 0.2 473,897,890 30,000,000Recebíveis Educacionais 0.6 0.6 106,277,608 76,002,562

Crédito Imobiliário 0.0 2.4 0 288,958,477Prestação de Serviço Público 1.0 3.0 163,231,333 370,031,201

Crédito Pessoa Jurídica 2.5 3.2 416,381,730 386,562,798Setor Público 3.9 3.5 657,175,734 431,861,506

Crédito Pessoal 17.6 11.8 2,965,525,101 1,434,974,361Financiamento Veículos 16.8 14.9 2,826,632,967 1,810,696,342Recebíveis Comerciais 14.3 21.5 2,400,171,326 2,621,017,044

Multiclasse 39.7 38.7 6,676,924,597 4,713,843,536Total 100.0 100.0 16,838,370,633 12,188,079,255


Volume of FIDC and Collateral Composition

Volume of FIDC emissions per yearIt does not include the Petrobras FIDCsSource: Uqbar - www.uqbar.com.br


Evolution of CRIs

Volume of CIRs emissions per yearSource: Uqbar - www.uqbar.com.br


FIDC Investor Profile

FIDC investor distributionThe total outstanding is about 92 bi BRe$Source: Uqbar - www.uqbar.com.br

Profile Total Outstanding (BRe$ Mi) FIDC Petrobrás (BRe$ Mi) 2009 (BRe$ Mi)Entities of Private Previdence 564,016,716 0 564,016,716

Investment Funds 3,709,936,051 0 3,709,936,051Entities linked to the Credit Originator 80,942,461,205 80,647,592,760 294,868,445

Other Financial Institutions 1,092,522,314 0 1,092,522,314Fin. Inst. Linked to Cred. Orig. 1,101,798,422 0 1,101,798,422

Foreign Investors 59,569,318 0 59,569,318Other non juridic entities 28,737,784 0 28,737,784

Other juridic entities 50,620,582 0 50,620,582Intermediary Inst. Members of Distr. Consorce 368,442,995 0 368,442,995

Sub Total 87,918,105,387 80,647,592,760 7,270,512,627Not considered 278,475,459 0 278,475,459

Not Known Affiliation 585,928,542 0 585,928,542Profile Not Defined 4,057,605,568 0 4,057,605,568

Total 92,840,114,955 80,647,592,760 12,192,522,195


JOAO GARCIASERGE GOOSSENS

CreditDerivatives

Globalsecuritisation

and CDOs

About the author

JOHN DEACON joined UBS in 2000 as Executive Director and Head of Debt Principal Finance in London. Prior to joining UBS he was Head of Principal Finance at Greenwich NatWest. Mr. Deacon began his career at Cameron Markby Hewitt, before moving to Clifford Chance. He graduated LLB (Hons) from Exeter University.

Mr. Deacon has worked as a securitisation, principal finance and derivatives specialist in the European and Asian markets and as an investor, issuer, investment banker and lawyer in London, Paris and Hong Kong. He has extensive global securitisation and principal finance experience.

Mr. Deacon is qualified as a Solicitor of the Supreme Court in England and Wales, a Solicitor of the Supreme Court in Hong Kong and an ACIB and has written articles for the International Securitisation Report and for the International Securitization & Structured Finance Report.

He has spoken at seminars and workshops for securitisation and credit derivatives industry professionals organised by Euromoney, AIC Conferences, ICC and Futures & Options World, and is a co-founder of the ThorABS asset-backed securities website (www.ThorABS.com).

John Deacon

Securitisation is the conversion of cash flows from underlying assets (including bonds or loans in a CDO transaction) into a smoothed repayment stream, via the issue of bonds, and can be used for a variety of purposes – to improve return on capital, to restructure balance sheets, to diversify funding sources, to increase liquidity or to improve strategic profile. In order to achieve successful transactions and accurately assess and value investments, issuers and investors both need to understand the issues involved, and to aid this understanding, the author focuses on motivation for, and structuring of, transactions, as well as identifying key areas of opportunity for the future.

The coverage includes a detailed overview of global securitisation, asset-backed and CDO structures, and extensive analysis of: recent synthetic and credit derivative structures used in CDOs and other securitisations; the new Basel Capital Accord; development in worldwide accounting standards; the technology of whole business securitisations; the workings of 52 global markets ranging from the UK and Europe to the USA, Asia, Latin America and Australasia.

The book is essential reading for securitisation and CDO practitioners at investment banks, commercial banks, law firms, accounting firms and rating agencies, as well as for financial and corporate issuers and investors, and includes a detailed lexicon of industry jargon and know-how.

Global securitisation and CDOsFinding and Harnessing Investment Skill

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Global securitisation and CDOs

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Joao Garcia BMB 2010 Presentation