Latin American Securitization: The Case of the Disappearing Political Risk
Claire A. Hill
University of Minnesota, Twin Cities - School of Law
Virginia Journal of International Law, Vol. 38, Spring 1998
Securitization, a complex financing technique, has been used by Latin American firms since the late 1980s. After the debt crisis of the mid-1980s, Latin American firms needed to develop new ways of appealing to foreign investors fearful of political risk; securitization, a transaction structure which had become popular in the United States, was well-suited for this purpose. The typical Latin American transaction structure differs from that commonly used in the United States. Yet, the chief value-adding mechanism is the same. The transaction structure extracts a high-quality, readily appraisable asset (a firm's receivables) from a lower quality and/or less readily appraisable, mass of assets and liabilities (the remainder of the firm).
Since the late 1980s, emerging markets countries and firms, especially those in Latin America, have increasingly entered the global financial community. Better quality Latin American firms are increasingly able to obtain financing from foreign investors on quite-favorable terms, using securitization and other, simpler structures. Domestic banks, Latin American firms' traditional sources of capital, facing more competition, are apparently reducing their "tax," and otherwise becoming more efficient: competition from foreign markets makes domestic disparities and inefficiencies harder and more costly to sustain. And domestic capital markets are maturing. Indeed, competition among financing sources also may be fueling a race to the top, as countries vie to adopt investor-friendly and business-friendly regimes to attract the most foreign capital.
The story of Latin American securitization is thus an arbitrage story, following theory's script: a too-wide spread has been exploited, and eventually, narrowed. But securitization's role in helping narrow the spread is more than a triumph of theory. The narrowed spread reflects amelioration of the conditions giving rise to the spread: the inefficiency of domestic banks, and immaturity of domestic capital markets. Foreign investor fears of political risk had declined as well, until the recent "Asian flu." However, Latin America appears to have caught only a mild case of the flu, and, as of this writing, investor fears of political risk in Latin America appear to be receding once again.
Latin American securitization does not deserve full credit for these changes. Investors' constant search for new opportunities, and their fading memories, would certainly have led them to Latin American firms. But securitization made the journey shorter, and perhaps, less perilous. For foreign capital markets investors, Latin American securitization provided a relatively safe entree into unsafe territory; it isolated risks those investors were willing to take from those they were not. Securitization thus contributed to, and arguably, accelerated, changes narrowing the spread it sought to exploit: an arbitrage dynamic writ large. The crisis in Asia may present securitization with another opportunity to accelerate the return of skittish foreign investors, and help resume the region's integration into the global financial community.
Number of Pages in PDF File: 28
JEL Classification: D4, F0, F3, F2Accepted Paper Series
Date posted: February 10, 2003
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