Securitization of Consumer Loans

Article by G. Gotlib, M. Skiadaressis and J. Tobias*

This article provides an overview of securitization in Argentina, and considers the tax treatment thereof.

1. Securitization Overview

   Driven by strong economic growth and a resurgence in consumer credit, consumer loans, personal loans and credit cards, the past five years have seen a solid growth in the securitization of consumer loans. Banks, home appliance retail chains and consumer finance companies have used this mechanism for years, hence the prediction that these types of securitizations are to remain as the base of the market. This assumes the expectation that banks will continue focusing on retail lending.

   Numerous factors have encouraged the use of this technique, including:

   (1) the current rate of inflation (approximately 25%), which in turn has fuelled a strong consumer demand because there is no incentive in saving in the local market,

   (2) the unattractive interest rates of term deposits, which leads investors to seek better investment opportunities,

   (3) the absence of investment opportunities with similar rates of return to those obtained through securities issued by a trust (between 13% and 16%),

   (4) the absence of a long-term credit market due to the high cost of funding, which has led banks and companies to focus on consumer financing (deposits are usually short term, and mortgage loans are long term),

   (5) the possibility for banks and retail chain companies to transform illiquid assets into liquid assets, while at the same time obtaining balance sheet relief,

   (6) the possibility of transferring the collections risk from the originator of the credits to the investors,

   (7) tax advantages that have been in place for years,

   (8) an improvement in the mechanisms for monitoring collections and

   (9) cheaper funding costs.

   Furthermore, although there was a relative decrease in capital market transactions in 2008 due to the elimination of private pension plans, a new player, the Argentine social security agency (Administración Nacional de Seguridad Social, ANSES) has emerged as a large investor adopting securitizations in order to fuel the economy.

2. Legal Framework

   2.1. Securitization

   "Securitization" can be defined as a financial transaction in which assets are pooled and securities representing interests in the pool are issued. In this way, illiquid assets are transformed into liquid assets. For example, a company that grants consumer loans aims to raise money in order to grant more loans. It can sell its existing loans, but it is unlikely to find a strong and liquid secondary market to sell such loans. A good alternative in this scenario would be to pool the consumer loans and sell securities or interests in the pool to investors, which, in turn, may find this investment more attractive than others. The debtors of the consumer loans will continue paying their debts, but such cash will flow to the investors (once expenses are paid).

   In general, any class of assets with a relatively predictable cash flow can be securitized. The most common assets include auto and consumer loans, credit cards, mortgages, corporate debt and future revenues, and lease payments. However, in Argentina certain requirements are imposed in order to obtain beneficial tax treatment. For example, the assets must...