Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 325Box 10-3 | Structured ProductsStructured products are collateralized securities that in general adopt the form of bonds. Duringthe last few years, the industry of structured products has grown significantly as a consequenceof risk disintermediation through securitization. The most prominent sector in the structuredproducts industry is the mortgage bond sector particularly in the United States, where at the endof 2001 the mortgage securities market reached $3.6 billion in debt outstanding. Mortgage bondsare securities backed by a pool of mortgages, and the United States has the greatest mortgagesecurities market in the world. In the United States, government-sponsored enterprises promoteand back mortgage securities, with the implicit or explicit guarantee of the federal government(for example, Fannie Mae and Ginnie Mae). As a consequence of collateral guarantees and diversification,these securities are highly rated, and their spreads over treasury bonds are low.Moreover; a properly developed mortgage securities market can be an engine of disintermediation,stimulating the securitization process, leading to better management of risks, improvingthe use of capital, and reducing interest rates. In countries that do not carry fiscal deficits and thatdo not issue government bonds, mortgage bonds can be an imperfect but valid substitute fortreasury bonds by creating a benchmark yield curve based on mortgage bonds. Latin America hasa great potential to develop mortgage markets, given that the macroeconomic framework is becomingmore stable and there is a huge housing deficit. The region has not achieved significantadvances in real estate finance, except for Chile, where mortgage products purchased by pensionfunds represented 17 percent of gross domestic product in 2000 and funded 66 percent of themortgage needs. Recently, Colombia introduced a mortgage securitization scheme based on thelong-established mortgage loan industry in the country.Other interesting structured products are those that use credit enhancements to allow corporationsand subnational governments to be rated better than the sovereign, and this is especiallyimportant in emerging markets. There are many forms of credit enhancements, includingover-collateralization, insurance policies against political and exchange risks, special-purpose vehicles,sinking funds, asset collateralization, multilateral organization guarantees, and offshore trusts.During the past decade, many Latin American issuers adopted these types of products in orderto be rated higher than their sovereigns. An interesting example is the province of Satta inArgentina, which sold its oil revenues to an offshore trust that issued a 15-year fixed-rate bulletbond.The oil revenues that the province sold to the trust backed these bonds. Despite the factthat the bond was over-collateralized, the structure also had an insurance policy against exchangerisks that covered 31 months of debt service and a six-month interest reserve fund. Standard &Poor's assigned an investment grade to that structured product, while the Argentine governmentwas internationally rated as a noninvestment-grade country. It is important to note that after theArgentine default, the Sarta Hydrocarbon Royalty Trust honored its debt service in time and form.Source: Particular Issues in Developing Corporate Bond Markets.tence of a stock market is another main requisite for developing the corporate bondmarket Three aspects that do not stem from the existence of a government bondmarket are particularly important: disclosure systems, credit rating systems, and bankruptcylaws. Every bond issuer has to disclose objective, relevant, and timely informationnot only about itself but also about its securities. It is important to establish soundCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub