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Investing in Brazilian Securitization Instruments

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					   Brasil Means Business, Amsterdam, Mar 29th 2010


           Investing in Brazilian Securitization Instruments

          João Garcia1 , Serge Goossens2 , Hebert Kimura4 , Lucas Neto5
                                 Jacob Perera3
            1 Sacred Heart University, Rue Alcide de Gasperi 7, Chambre de Commerce, L2981

           Luxembourg (joaogarcia18@yahoo.com) 2 Senior Quantitative Analyst, Treasury and
         Financial Markets, Dexia Bank (Serge.Goossens@gmail.com) 3 Professor Titular, Dep. of
           Economy 4 Professor Adjunto, Dep. of Economy 5 Ph.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.




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

            Half the Brazilian market is exposed to materials and energy
            Ranked 75th on Transparency International’s Corruption
            Perceptions Index
                    From the BRICS we have: China (79th), India (84) and Russia
                    (146th)
            Population of about 200m
            Average return of 19.9% per year in the last 10 years
                    MSCI EM : 10.1% per year
                    MSCI World: 0.2% p.a.
            Market capitalisation 1.3 trillion USD
                    Second largest for EM
            40% of Brazilian Equity Index: Vale do Rio Doce (mining) and
            Petrobras (oil)


                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   2 / 21
   Main Characteristics
            Potencial booming consumer market
            Brazilian incomes will rise and so will consumer spending
                    White goods, autos and property
                    Lowest ever interest rates
                            Credit and consumer spending will increase enormously
                            Recent discovered deep sea huge oil fields set to become a major
                            investment attractor
            Oil income will be in the coming years / decades a boost to the
            country industry
            It has the potential to contribute enormously its rise as an
            important economic power.
            Possibilities of investments in stocks and shares, energy,
            agriculture or Brazilian real estate
            World Travel and Tourism Council (WTTC) estimates:
                    2010: Growth of 5.9% of GDP
                    Expected Annual growth (next 10 years): around 5.6%.
                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   3 / 21
   Housing in Brazil

    Acceleration Growth Program / Programa de Aceleração de
    Crescimento
        Government Program: My Home, My Life Phase 1
                    City Ministry Resolution 141
                    Time Horizon 2010
                    Gov. Subside 34 bi BRe / 14 bi Eur / 19 bi USD
                    Caixa Economica Federal (FGTS)
                    Goal: Financing 1 mi houses for low income population
            Government Program: My Home, My Life Phase 2
                    City Ministry Resolution 141
                    Time Horizon 2010
                    Gov. Subside 48-72 bi BRe / 20-30 bi Eur / 27-40 bi USD
                    Caixa Economica Federal (FGTS)
                    Goal: Financing 3 mi houses for low income population



                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   4 / 21
   Securitization and Capital: Originator Point of View


                                                                                    Bank A
                                                                 Heavily Invested                                  Heavily Invested in
                                         Before                                                  After             Securitization instruments
                                                                 in Bonds

                                                     Loss Distribution                                     Loss Distribution

                                                                                                                            ECAP
                                  Probability




                                                                                             Probability
                                                                       ECAP
                                                                                Less ECAP



                                                                Loss                                                 Loss

                                           EL                                                              Business Strategy
                                                      Securitization
                                                                                                              Download single name
                                                      Loss Distribution
                                                                                                              instrument…
                                                                              1 Investors
                                   Probability




                                                                                                              Upload multi name
                                                                              2 Stays in the Bank             instrument…
                                                        1                                                    Logic: Less RC and ECAP
                                                 2                2
                                                                Loss




            Focus on Business Origination
                    Minimal concern with managing a portfolio of loans
            Insentive: Economy of Scale
                    Reduction in costs
                    Higher Efficiency in the use of capital
                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                                                                        Mar 29th 2010   5 / 21
   Securitization and the Economy

            Assume one invests in houses, say 10 houses




            Impact on economic activity is the one of only 10 houses
                    Construction companies
                    Real state rental and vendors
                    Housing Accessories
                    Banks and other financial companies
            One delay on rental payments is immediately seen by the investor


                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   6 / 21
   Securitization and the Economy
            Assume one securitizes the cash flow of the houses




            Positive impact on economic activity is the one of 1000 houses
                    Construction Companies build more houses
                    There are more houses to rent and sell
                    More housing accessoires are sold
                    Increase in banking and financial activity
            Houses became more affordable!
                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   7 / 21
   Securitization: the Investor Perspective

                                                   Markowitz and Portfolio Management




                                             Portfolio 1:                     Portfolio 2:
                                          Two Large Positions            Several Small Positions




    Assumptions (CAPM based):
        A portfolio manager is better off with Systematic than with
        Idiosyncratic risk.
        Substituting single name to multiname exposure increases return
        and efficiency in the use of capital.
                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                           Mar 29th 2010   8 / 21
   Securitization: the Investor Perspective

                                     Collateral                             ABS Notes




                                                                                               Risk Increases
                                                          Securitization




                                     Bonds, Loans,
                                     ABSs


                          • 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
                          • Substituting single for multiname exposure increases return and efficiency
                          In the use of capital.
                          • CAPM supports the investment strategy




            What went wrong then?
                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                                        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, steel
                    Oil: recent discovered huge deep sea reserves
            Insentive 2: Important forthcoming world eye catching events
                    Event 1: World Cup 2014
                    Event 2: Summer Olympic Games 2016
                    Events (1 + 2) implication:
                            Enormous investiments in infra-structure:




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   10 / 21
   Brazil and Securitization


    Construction related Jobs consequences:
       An enormous increase in consumption
                    Housing apparels
                            Ikea like companies
                    Financials:
                            Mortgages
                            Credit card and auto loans
                    Transportation companies
                            Air planes, trucks, busses
                    Turism realated companies
                            Hotels and restaurants




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   11 / 21
   Brazil: Securitization Milestones

            Mesbla 1992: Credit card receivables
            Mappin 1995: Client receivables
            Bompreço 1996: credit card receivables
            Cibrasec 1999: Real estate securitization




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   12 / 21
   Brazil: Securitization Milestones

    Two majors Securitization instruments
            CRIs: Certificate of Real Estate Receivables
            FIDCs: Receivables Investment Funds




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   13 / 21
   Real Estate and Securitization



            CRIs: similar to Mortgage Backed Securities
            Colateral: real estate receivables (residential or commercial)
            Tranches: senior or junior
            Interest may be fixed or floating
                    Indexed to Brazilian price indeces
                            IGPM: reflects prices in general
                            IPCA: linked to consumer prices
                            It may not be indexed to foreign currencies
                    Payments of interest and / or principal usually monthly
                            Single payment at maturity is possible




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   14 / 21
   Asset Backed Securities

            FIDCs: Receivables Investment Funds
            Structured investment vehicles
                    Pool of receivables originated by one or multiple sellers
            Receivables:
                    Any kind of credit rights
                    Originated from operations in the commercial, industrial, services
                    or financial sectors
            Receivables can be performed or future flow
            Open or closed-ended funds
            Senior, subordinated and mezzanine classes / tranches
            A FIDC can have several issues, of different terms of duration
            Interests can be fixed or floating
                    Usually indexed to SELIC, Brazilian Fed funds
                    Indexation to foreign currencies is not allowed

                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   15 / 21
   Brazil: Securitization and Sectors

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

                                        Sector                                    Amount (BRe)     (%)
                              Financial Intermediation                           7,112,263,054     58.4
                                    Multisegment                                 2,361,016,707     19.4
                              Transformation Industry                            1,510,665,510     12.4
                                     Commerce                                      414,837,682     3.4
                              Eletricity, gas and water                            370,031,201     3.0
                                       Services                                    173,980,225     1.4
                                    Construction                                    88,958,477     0.7
                              Agriculture and Pecuary                               73,237,107     0.6
                                 Telecomunications                                  43,348,000     0.4
                                          N.A.                                      28,071,292     0.2
                                      Education                                      9,420,000     0.1
                      Insurance and Previdence Complementar                          1,250,000     0.0
                                   Pessoa Física                                     1,000,000     0.0
                                          Total                                  12,188,079,255   100.0



                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                          Mar 29th 2010   16 / 21
   FIDC and Collateral Composition

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

                                                   2008 (%)      2009 (%)          2008 (BRe)       2009 (BRe)
                      Tributos                       0.6            0.0           100,000,000            0
                      Direitos                       0.0            0.0                0             1,000,000
                Títulos Mobiliários                  0.3            0.2            52,152,346       23,131,427
            Recebíveis do Agronegócio                2.8            0.2           473,897,890       30,000,000
             Recebíveis Educacionais                 0.6            0.6           106,277,608       76,002,562
                Crédito Imobiliário                  0.0            2.4                0           288,958,477
           Prestação de Serviço Público              1.0            3.0           163,231,333      370,031,201
             Crédito Pessoa Jurídica                 2.5            3.2           416,381,730      386,562,798
                   Setor Público                     3.9            3.5           657,175,734      431,861,506
                 Crédito Pessoal                     17.6          11.8          2,965,525,101    1,434,974,361
             Financiamento Veículos                  16.8          14.9          2,826,632,967    1,810,696,342
              Recebíveis Comerciais                  14.3          21.5          2,400,171,326    2,621,017,044
                    Multiclasse                      39.7          38.7          6,676,924,597    4,713,843,536
                        Total                       100.0         100.0          16,838,370,633   12,188,079,255



                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                            Mar 29th 2010   17 / 21
   Volume of FIDC and Collateral Composition
            Volume of FIDC emissions per year
            It does not include the Petrobras FIDCs
            Source: Uqbar - www.uqbar.com.br




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   18 / 21
   Evolution of CRIs


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




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                         Mar 29th 2010   19 / 21
   FIDC Investor Profile


            FIDC investor distribution
            The 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                3,709,936,051
           Entities linked to the Credit Originator          80,942,461,205             80,647,592,760           294,868,445
                 Other Financial Institutions                 1,092,522,314                    0                1,092,522,314
              Fin. Inst. Linked to Cred. Orig.                1,101,798,422                    0                1,101,798,422
                       Foreign Investors                        59,569,318                     0                 59,569,318
                  Other non juridic entities                    28,737,784                     0                 28,737,784
                     Other juridic entities                     50,620,582                     0                 50,620,582
      Intermediary Inst. Members of Distr. Consorce            368,442,995                     0                 368,442,995
                           Sub Total                         87,918,105,387             80,647,592,760          7,270,512,627
                         Not considered                        278,475,459                     0                 278,475,459
                     Not Known Affiliation                      585,928,542                     0                 585,928,542
                      Profile Not Defined                       4,057,605,568                    0                4,057,605,568
                              Total                          92,840,114,955             80,647,592,760         12,192,522,195




                                                      Securitization in Brazil
Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                               Mar 29th 2010      20 / 21
                                                           DEACON
sation and CDOs
sing Investment Skill                                                                                                                                            Global
                                                                                                                                                           securitisation

                                              Global securitisation and CDOs
Deacon

 flows from underlying assets (including
n) into a smoothed repayment stream,
d for a variety of purposes – to improve
                                                                                                                                                             and CDOs
                                                                               The Art of
 e sheets, to diversify funding sources, to
 ic profile. In order to achieve successful                                                                                                                “As a description of the challenges faced in seeking
 value investments, issuers and investors                                                                                                                  out the elusive alpha of active management, Charles
olved, and to aid this understanding, the                                                                                                                  Jackson’s book merits an alpha-plus.”
  structuring of, transactions, as well as                                                                                                                    – Alastair Ross Goobey, Chairman, Hermes




                                                                                Credit
r the future.                                                                                                                                                    Focus Asset Management

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ew of global securitisation, asset-backed                                                                                                                  mathematics a concise guide to the ecology of the
 nalysis of: recent synthetic and credit                                                                                                                   jungle. He describes the landscape and history of the
nd other securitisations; the new Basel                                                                                                                    habitat, classifies its successful predators, examines
ide accounting standards; the technology                                                                                                                   how they are themselves hunted and concludes with
workings of 52 global markets ranging                                                                                                                      an acute analysis of the investment and business
sia, Latin America and Australasia.                                                                                                                        strategies that will shape the industry’s future.”
                                                                                                                                                               – Colin Maltby, Chief Executive, BP




                                                                                Derivatives
 curitisation and CDO practitioners at                                                                                                                           Investment Management Ltd
  law firms, accounting firms and rating
                                                                                                                                                           “Charles Jackson’s book is highly topical and a
d corporate issuers and investors, and
                                                                                                                                                           veritable tour de force on issues facing the fund
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                  FINANCE/INVESTMENT
                                                                                     JOAO GARCIA                                                           your investment portfolio. Instead it carefully shows
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                                                                                   SERGE GOOSSENS                                                              – Daniel L White, Professor of Finance
                                                                                                                                                                 Emeritus, Georgia State University


 finance.com



                                                                                  front title line up with wf logo 3mm shift to left? 10/8mm clear right




         More info available on:
            http://www.sergeandjoao.com/
                                                       Securitization in Brazil
 Garcia, Goossens, Kimura, Lucas & Perera (for Amsterdam)                                                                                                                   Mar 29th 2010                           21 / 21

				
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