Brazilian credit card law will boost non-bank ABS

The Brazilian parliament has passed legislation for payment arrangements, called law 14.031, which Fitch Ratings says will be positive for credit card securitizations.

Most securitizations in Brazil come from the real estate and agriculture sectors, with laws allowing the packaging of these receivables into special purpose vehicles. 

A key aspect of a securitization is that the vehicle used to transfer the assets is bankruptcy-remote, meaning that the collapse of the originator or lender does not stop noteholders from interest and principal payments.

Now, the newly introduced law clarifies that payment arrangement proceeds, once securitized, are not subject to consolidation in the case of bankruptcy or insolvency.

“This is an important development, as it provides clarity on the ownership of collections upon bankruptcy of the originator,” said Fitch.

Brazil has seen a lot of growth in credit card securitizations linked to borrowers with no bank relationships.

Transactions that are set to benefit from the new law include a raft of securitizations from DMCard Cartoes de Credito, which has brought recent deals such as FIDC DMCard and Debêntures da DMCard Securitizadora.

Fitch had put these deals on negative outlook in response to the coronavirus outbreak.

Credit cards are often the only credit line available to borrowers in Brazil with a middle income. Credit cards are also often managed through supermarket brands, emphasising essential consumption during the pandemic.

Fitch released a note in June saying that, despite the uncertainty brought about by the crisis, it should be noted that many borrowers were prioritising credit card repayments over other financial concerns, predicting the non-bank lenders to prove resilient despite a slowdown in March and April originations.

Brazilian lenders like Fortbrasil and Credz Administradora de Cartoes have fought off origination and slowed down by introducing credit cards linked to Visa and Mastercard, expanding the range of options their borrowers can use during lockdown.

Fortbrasil and DMCard usually encourage customers to continue spending by having card pay-offs at retail outlets. This is key for Brazilians who do not have bank accounts — equating to almost a third of the country, according to JP Morgan.

Government support measures required workers to sign up to a bank account at government-owned firm Caixa Economica Federal, resulting in a flood of new accounts.

These borrowers, which previously had no banking relationships, were then able to pay off their bills with the non-bank lenders via the digital channels while the country was in lockdown.

Brazil had a thriving securitization market before the global financial crisis, but as with many emerging markets its securitization sector declined as structured finance products fell out of favour — the economic scars on the American economy left by collateralised loan obligations (CDOs) scared most investors away. 

But the market has slowly been increasing in terms of size and scale over the past few years.

Brazilian securitization reached a total of R$51.2bn (£7.2bn) in 2019, which represents an increase of 63% compared with 2018.

As non-bank sectors in other jurisdictions struggle to survive the pandemic, Brazil’s emerging alternative lenders may be on the road to securing a long-term position in the securitization market.