Analyzing Brazilian ABS: FIDCs

Abstract

The Brazilian asset-backed security (ABS) market presents many opportunities and obstacles to investors, especially foreign investors who are accustomed to transparent markets and a wealth of information. This article shows that financial models can actually help with this problem, if they are used correctly. Rather than taking the data for the structures at face value and feeding them to a financial model in one direction, this approach utilizes a feedback loop in which the model benchmarks the performance of the security. The author shows how this approach can be used to evaluate and track the risks in this evolving market by analyzing two similar deals with different structures and tracking their performance from 2007–2009.

The analysis focuses on the tumultuous life of Fundo de Investimento em Direitos Creditórios (FIDC) PanAmericano Veículos I, a Brazilian FIDC backed with vehicle loans that were originated by Banco PanAmericano. This FIDC is the perfect subject for such a study. It encountered the “perfect storm” of problems. Its investors were lucky to have received their capital back, as well as to have earned the indicated return. The FIDC matured five months before Banco PanAmericano was restructured because of a massive fraud carried out by management. The FIDC survived only because the bank was able to support the deal through frequent transfusions of new loans and the lax enforcement of regulations in Brazil.The model proposed here was used to analyze FIDC PanAmericano Veículos I during this turbulent period.