S&P Global Ratings expects new issuances in Latin America to increase about 15% in 2024 (see chart 1). This reflects that issuance volumes in the region were weak in 2023, the relatively strong economic growth in Brazil, and increased activity in the cross-border market. We anticipate interest rate cuts in the region, but money will remain expensive. We also expect that the region's economic growth will slow down to 1.2% in 2024. We estimate that market-wide issuance in Latin America will total about $29.4 billion in 2024.

Chart 1

In Brazil, strong agricultural production and higher household spending should favor ratings and collateral performance of trade receivables, consumer credit, and residential financings. Brazilian issuances should continue to account for the bulk of issuance in Latin America, and we expect new asset classes in this market. We now expect the Brazilian economy to expand 1.5% in 2024 compared to 1.2% in 2023, driven by continued, albeit diminishing, fiscal support. Lower domestic interest rates will bolster a recovery in investment, especially toward the second half of 2024.

In Mexico, issuances remain subdued across all asset classes. We continue to believe that activity could pick up in the coming months, as originators may want to secure funding ahead of the elections. In addition, investments associated to nearshoring could also be funded via capital markets, particularly equipment and real estate. Ratings performance remains solid amid stable collateral performance. Strong consumption (helped by robust remittances), resilient manufacturing output, and a sharp uptick in public nonresidential investment continue to drive growth in Mexico. We anticipate that Mexico's economy will grow 1.8% in 2024.

In Argentina, the trajectory of securitization will primarily hinge on the evolution of key macroeconomic variables. To the extent that the new administration successfully steers toward a more stable environment and addresses major structural macroeconomic imbalances, longer-term stability may be accompanied by more diversified and longer-term financing that could include mortgages and other types of secured loans. We currently expect that Argentina's economy will contract 1.5% in 2024.

In the cross-border market, money remains expensive, and the use of structured finance should continue to aid originators to reduce the risk premiums associated with operating and construction risk in the infrastructure space through the issuance of repackaged securities. Financial and non-financial future flows, particularly exports, offer an alternative to raise debt at a lower cost for commodity producers and other originators in the region.

Chart 2 shows our Latin American structured finance rated portfolio.

Chart 2

As shown in chart 2 above, the credit quality of our rated universe remains in the high end of the corresponding national scales and in the investment-grade category for the cross-border market. Asset-backed securities (ABS) synthetic (particularly repackaged securities), residential mortgage-backed securities (RMBS), and ABS consumer are the most popular asset classes in the region.

Brazil: Growing In Size And Complexity

Brazil is the region's largest market. Its capital markets and private credit continue to grow in size and complexity. We anticipate that more stable macro conditions, especially lower base interest rates, and the absence of political uncertainty will allow sponsors to increase origination and the use of securitization. In this scenario, we expect traditional securitization sponsors and originators to look to tap the market during the year, in order to address their refinancing and expansion strategies. In particular, we see transactions backed by pension and payroll deductible loans, trade receivables, and home equity loans as trending assets in early 2024. We continue to focus on non-conventional risks, particularly in the private credit markets and the agricultural sector. Conflicts of interest, minority investor protections, idiosyncratic origination practices, and unique market risk are among the non-conventional risks we have identified in the Brazilian market.

ABS

Corporate-backed agribusiness receivables certificates (CRAs) and mortgage-backed securities (CRIs) 

The performance of corporate-backed CRAs and CRIs is driven by the credit quality of the corporate obligors. We expect these asset classes to continue representing most of the rated Brazilian agribusiness and real estate receivables transactions issued in 2024--as has been the case for the past several years. Conditions for the corporate sector in Brazil have improved as inflation and interest rates have come down.

Medium-size enterprise (SME) corporate loans and trade receivables  

Trade receivables transactions also continue to benefit from conservative minimum credit enhancement levels and active management (by consultants and managers) to prevent rapid pool deterioration through more stringent origination policies. As the macro conditions improve, we expect origination of credits to increase and new securitizations to be issued. Nonetheless, SMEs that faced liquidity pressures in 2023 are likely to remain in a sensitive position early in 2024 as the credit markets continue to adjust. Therefore, some volatility in pool performance, especially for SME loans, is likely in the first half of 2024.

ABS consumer 

Improved economic conditions should favor the performance of underlying pools. However, persistently high household indebtedness is likely to still pressure the performance of unsecured consumer credits and credit cards. We expect transactions backed by pension and payroll deductibles and student loans to remain fairly stable in 2024--as they have in recent years. We also anticipate the performance of pools backed by auto loans and auto equity to remain fairly stable in 2024, after some volatility in recent years stemming from challenging economic conditions.

RMBS

We also believe transactions backed by residential financing and home equity loans will likely continue trending in 2024. Despite the expected improvement in the credit markets, home equity loans typically target a niche of borrowers that need financing with a long-term amortization profile and that can pledge collateral at low loan-to-value (LTV) ratios and high interest rates. We expect the performance of home equity RMBS transactions to remain stable in 2024 as overall economic conditions will benefit residential borrowers and SMEs. Also, under improving market conditions, we expect prepayments to remain fairly high.

Commercial mortgage-backed securities (CMBS)

We expect prime commercial properties to maintain adequate operational performance this year. Positive economic trends in 2024 are likely to support stronger consumer spending, resulting in potentially higher average rent prices and lower vacancies in shopping malls and "last-mile" logistics assets. However, we believe nonprime properties will continue to face difficulties as property managers try to increase occupancy rates and rent levels amid challenging conditions for small businesses and retailers, as well as intense competition from online retailers. Similarly, additional logistics assets capacity to be delivered in key markets in Brazil will pressure rent prices on sup-prime properties.

Mexico: Issuance Has Been Weak, But Funding Needs Are High

New issuance levels and amounts in 2024 to present modest growth relative to 2023

We expect new issuance levels and amounts over the next year to present modest growth relative to 2023's volumes. Last year, only nine deals were placed for an amount equivalent to USD $587.4 million. These were historically low issuance volumes and, in our view, resulted from the relatively high interest rate environment, uncertainty associated with the asset class, and depressed investors' sentiment in general.

The upcoming presidential elections in June 2024 introduce an element of uncertainty that could affect market dynamics. Additionally, the current crisis within non-bank financial institutions (NBFIs), which is marked by defaults and accounting issues, has resulted in the prevailing investor reluctance. We believe new issuance could rise as financing needs for investments in nearshoring and transportation infrastructure increase. It could also bridge the financing gap for consumers and small and medium enterprises.

2024 could be positive for the Mexican structured finance market

2024 could be positive for the Mexican structured finance market. Better macroeconomic conditions in the country, combined with potential investment opportunities and a recently approved securities law reform, could bolster the market growth. That said, there are some factors that could pressure the growth of the market this year. Things to keep in mind include: the still-high interest rate environment; risk aversion from investors, particularly in the non-bank financial sector; and increased activity in private financing.

Nearshoring is a hot topic in Mexico

We believe that CMBS transactions could serve as an alternate financing option for industrial real estate in northern Mexico. These projects, which are increasing in demand, will require additional equipment for construction and manufacturing that, in turn, can be used as collateral for ABS transactions. Increased job formation in the northern part of the country could also lead to higher demand for housing, and, in turn, RMBS-backed transactions.

ABS

Equipment ABS transactions will continue to dominate market activity 

As in previous years, equipment ABS transactions will remain as the most active asset class in the market. Among the securitized portfolios, we will continue seeing mixed portfolios including combinations of auto leases and other types of equipment (namely construction, heavy machinery, industrial, and transportation granted to small and medium enterprises).

This year, several deals from our rated portfolio will enter their amortization period, which could either trigger the need for refinancing those portfolios or will further strengthen the deals' credit enhancement levels as they deleverage. In addition, we believe there might be increased demand for equipment financing as a result of increased investments in mainly the northern region of the country.

Furthermore, we still see securitization arising as an attractive financing alternative, especially for non-NBFIs, whose sector has been hit as a result of the failures of some of the largest participants in the country.

Opportunities set for other ABS deals 

In our view, other asset classes within the ABS space might enter the scene this year. Consumer ABS has been a historically popular asset class in Mexico. Increased consumer confidence and economic activity could drive consumer ABS deals. On the other hand, several of the fintechs that have started operating in Mexico had previous experience in securitizing their portfolios abroad. We believe these entities could eventually replicate their securitization experience, which could support the use of ABS in Mexico.

Mexican structured finance transactions have evolved favorably by mitigating key risks while offering sound enhancements to investors. For instance, the ABS sector has exhibited solid performance and ratings stability over the past few years, despite the macroeconomic challenges brought on by the COVID-19 pandemic and the NBFI crisis.

RMBS

For the second year in a row, there were no new RMBS issuances.  

Infonavit and Fovissste are not expected to issue RMBS in the near future; however, we believe there's hope for the Mexican RMBS market. As new participants are coming into the scene, we believe that there is potential in prime residential mortgages, which could lead to a revitalization of Mexico's RMBS market in the long term.

Performance-wise, we expect that transactions from the government agencies will maintain its credit quality overall.  

In our view, deals originated by Infonavit and Fovissste will continue presenting relatively stable performance and robust credit enhancement levels; however, delinquency levels on Infonavit portfolios remains a key variable to follow. We estimate that nonperforming loans (NPLs) on Fovissste's transactions will close the year at 10.3% on average, whereas those in Infonavit deals could potentially reach 17.3% at the end of 2024; in some cases, they will breach the early amortization events associated with the performance of the securitized portfolios.

Finally, our legacy portfolio, which is comprised mainly from deals originated prior to the 2008-2009 crisis, by NBFIs, will continue facing several challenges, and potential default risk either in the timely payment of interests or principal repayment at maturity. These deals present weak financial positions, as reflected on their overcollateralization ratios, and high NPLs as a percentage of the outstanding balances. This is already incorporated in the low rating levels these deals have.

Argentina: Conditions Remain Challenging, But There Are Changes Underway

Securitization in Argentina will face a very challenging first part of 2024, and its trajectory will primarily hinge on the evolution of key macroeconomic variables.

Inflation will be higher in the first-quarter 2024, while real interest rates will likely remain in negative territory. Even though this may keep cost of funding for originators at low levels, the impact on real origination will be limited amid high and volatile inflation rates and impaired economic conditions. Issuance will likely remain weak in the coming months, but activity then may pick up especially if there are signals of effective policy execution by the new administration that lead to an improvement in the outlook for the economy.

We expect last year's market concentration both in terms of issuers and asset classes to continue in 2024, and for issuance to be primarily steered by a by few frequent issuers holding a robust position within the consumer segment, even in the adverse context for the sector. There is still room for securitization in their portfolios, but issuance pace will be primarily driven by market conditions and investor demand.

Many investors are currently looking for hedges against inflation, which keeps the appetite for securitized products (mostly denominated in Argentine pesos with capped variable rates) at low levels until inflation decreases from current rates. Unexpected swings in the exchange and interest rates may reduce investor demand even further.

Transactions backed by trade receivables and agribusiness-related deals could increase their participation in the local market. Following the historic drought last season, production volume for major crops is likely to increase consistently in 2024 due to improved weather conditions and extended planted areas. Other factors such as further devaluations of the Argentine peso, international prices of commodities and agricultural inputs, proposed increases in export taxes of certain products, and changes on taxes and restrictions on imported agricultural inputs may all play their parts. Some new originators linked to other regional economies in Argentina may also enter the market in 2024.

The consumer loan sector has a challenging year ahead of it

Reductions of transport and energy subsidies, limited credit, and the impact of devaluation on prices will take a toll on consumption and household purchasing power this year. Even though issuance will likely weaken, for outstanding deals (mostly backed by static pools of fixed-rate loans), inflation has a favorable effect for borrowers by decreasing the real weight of debt.

Still, unemployment and poverty may spike and lead to increased delinquency ratios. In this sense, there are different ranges of sensitivity to macroeconomic conditions among the consumer sector. While most originators target low and middle-income borrowers with zero-to-limited access to banking credit, payroll-deductible loans, granted to workers in the public sector and retirees and automatically collected through discount codes, may be in a better position to withstand more stressful scenarios than, for example, personal and consumer loans for the general public with voluntary payment.

However, there could be many potential shifts under the new administration that may result in changes in the landscape for the consumer sector. The so-called omnibus bill, for example, proposes to open up the use of discount codes to any player and not only mutual associations, as it is the case now. This may benefit banks, fintech companies, and NBFIs that grant credit, which may be able to collect installments directly by discounting them from the borrowers' accounts at the time their salaries are credited. This generally improves collection figures and lowers the cost of risk for these entities, which may result in lower interest rates charged to borrowers. Coupled with other policies towards increasing credit supply in the financial system, mutual associations may face increased competition from banks, which benefit from a significantly lower cost of funding, and fintechs.

Credit cards companies focusing on performance rather than growth

Real origination may stay weak in the current macroeconomic scenario, while reforms on credit cards included in Mr. Milei's presidential decree may have limited impact in the short term. Companies will keep monitoring their underwriting policies and collection processes to avoid a rapid decline in pools, especially in the first semester of 2024, in which we expect certain deterioration in portfolio performance. In particular, target obligors for credit cards companies in the structured finance market have low to medium incomes, and many of them work in the informal sector. Therefore, deteriorating macroeconomic conditions can have a more severe impact on the payment capacity of cardholders.

Weakening economic conditions also present downside risks to servicers and collection agents' financial position, which may lead to negative rating actions. Limited funding sources, lax internal controls, and weak corporate governance exacerbate these risks. These portfolios usually require intensive servicing, and any replacement of servicer or collection agent may result in material cash flow disruptions.

RMBS: relatively stable performance, with no origination at sight

Origination volume of residential mortgages will remain almost non-existent in the short and medium terms due to the high and volatile levels of inflation, lowered income as a proportion of property values, low savings rate for households, and a track record of policy unpredictability, uncertainty, and macroeconomic distortions, among other factors. To the extent that the new administration successfully steers toward a more stable environment and addresses major structural macroeconomic imbalances, longer-term stability may be accompanied by more diversified and longer-term financing that could include residential mortgages.

In the meantime, we expect the performance of outstanding loans, all denominated in purchasing value unit (UVAs), to remain relatively stable per the low LTV ratio and maximum DTI provisions for obligors, which creates incentives to continuing paying-down their obligations. Delinquencies have been historically below 2%, and we do not expect significant increases, even considering that UVAs are linked to inflation.