Press Clippings

01 May 2007CEE Surfs A New Wave Of Structured Finance Products — Michael Marray, The  Banker

A Surge Of New Offerings Are Coming Out Of Central And Eastern Europe, With Russia And Kazakhstan Showing The New EU Countries How It Should Be Done.

The pipeline of structured finance offerings out of central and eastern Europe is getting busier, after a surge of deals out of countries such as Russia and Kazakhstan during 2006, and the first offering of residential mortgage backed securities (RMBS) from the Ukraine in February of this year.

The fast-growing consumer loan and mortgage finance sectors across the region have banks looking at refinancing for large portfolios of auto loans, mortgages and consumer loans.

Diversified payment rights (DPR) transactions have also become a key source of funding, with tranches structured to investment grade obtaining finer pricing on the international capital markets than senior unsecured bonds.

In February, Ukraine Mortgage Finance 1 was launched as the first ever international RMBS offering out of the Ukraine, backed by first lien mortgages originated by Privatbank. This deal was lead managed by UBS.

The $134m-worth of senior notes, rated Baa3 by Moody’s and BBB- by Fitch, had an average life of 3.4 years, and priced at 210 basis points (bp) over Libor. The $36.9m-worth of Ba3/B+ rated notes with a longer average life of 7.2 years priced at a 375bp spread. There was a small $9m first loss piece, which was retained by Privatbank.

Sub-investment grade

«Ukraine is a sub-investment grade country, so senior unsecured funding for Ukrainian banks on the international capital markets is relatively expensive, perhaps somewhere between 260bp and 300bp over Libor,» explains Francesco Dissera, head of structured finance in central and eastern Europe at UBS.

«The senior tranche of the Privatbank deal priced at 210bp, so there is a clear incentive to access the securitisation market as a funding tool, as well as for capital relief and asset/liability management purposes,» he adds.

«All the Class A notes were sold to asset backed securities (ABS) investors rather than emerging markets investors, while the Class B notes were purchased entirely by emerging markets investors,» says Mr Dissera.

«The Class B notes, which have a step up and call at year seven, have the same rating as the bank itself, so investors were getting a secured bond with a yield pick-up compared to a senior unsecured Privatbank bond.»

Strong demand

UBS and Privatbank roadshowed in February in London, Paris, Frankfurt, Munich and Vienna. Demand was very strong, and on the first morning in London they had a single investor who wanted to buy the entire Class B tranche.

There could be one or two more deals out of Ukraine during 2007. But in new EU countries, such as Poland, Hungary and the Czech Republic, securitisation has been much slower to take off, mainly because the banking sectors of these countries are dominated by foreign banks, which can fund cheaply at group level.

This is in marked contrast to Russia, where the speed with which the securitisation market developed during 2006 outstripped all expectations. Investor appetite for Russian risk is currently very strong among ABS investors, as is also the case for Eurobonds and in the syndicated loan market.

There have been transactions backed by auto loans (MDM Bank, Russian Standard Bank and Soyuz Bank), consumer loans ( Russian Standard Bank), Diversified Payment Rights (Alfa-Bank and MDM Bank), and residential mortgages (state-owned Vneshtorgbank, Gazprombank subsidiary Sovfintrade, and, coming soon, DeltaCredit Bank).

Alfa-Bank opened the markets for Russian DPRs in March 2006, did another deal last December, and returned to the market in March 2007, selling 145m-worth of Baa3 rated notes at a 190bp spread, and a $200m tranche at a 200bp spread. The deal was lead managed by Dresdner Kleinwort and Merrill Lynch.

«This is the third deal out of our diversified payments rights securitisation programme, and about 45% of investors were new to our transactions,» says Simon Vine, managing director at Alfa-Bank.

«DPRs allow us to broaden our investor base, as well as getting tighter pricing than on our senior Eurobonds,» says Mr Vine. «DPR pricing is also more stable than senior debt, as we have seen during the recent period of volatility on the global financial markets. However, though spreads on our senior bonds did widen out in February and March, this followed a period of steady tightening, so spreads in March were still comparable to levels seen last November.»

The next step for Russian issuers could be deals featuring tranches wrapped to AAA by the monoline insurers, though up to now the monolines have remained quite wary of Russian risk.

Natural progression

«Moving on to AAA wrapped tranches would be a natural progression for the Russian DPR market, and we may start to see some interest from the monoline insurers,» says Gary Kochubka, director in the emerging markets structured finance group at Standard & Poor’s in New York.

«However, unless we were to start seeing Russian state-owned banks doing DPR transactions, the market will be a relatively small one for insured DPR tranches, given the overall capacity of the private banks within the Russian financial system,» he says.

«In Russia, many private banks are still below investment grade in the B or BB range, so there is a big arbitrage between a senior unsecured offering and a securitisation,» says Pierre Martignoli, head of securitisation, EMEA, at Merrill Lynch.

«In addition, while Eurobonds for Russian banks usually have a three-year term, ABS investors have a strong appetite for deals with a five-year maturity,» Mr Martignoli adds. «And banks are also using securitisation as a tool for asset/liability management, as well as a way to diversify their funding sources.»

«On Russian RMBS deals you see both ABS investors and emerging markets investors, depending on the tranche,» says Armin Lindtner, head of emerging markets securitisation (CEEMEA) at Merrill Lynch. «The senior investment grade tranches are soaked up by the usual ABS investor base, while for the BB rated notes you also see emerging market Eurobond investors buying structured product,» he says. «Emerging markets investors like the fact that they can get a secured bond with a rating around the same level as the originator’s own rating.»

In April, Societe Generale was getting ready to launch a dollar-denominated RMBS deal out of Russia, under the name Red & Black Prime Russia MBS No 1. The loans are all originated by DeltaCredit Bank, a subsidiary of Societe Generale.

«On Russian deals, investors are paying a lot of attention to the quality of the originator, and are quite demanding on information relating to the underwriting and recovery procedures of the originator,» says Jerome Jacques, head of MBS securitisation Europe at Societe Generale Corporate & Investment Banking. «Investors are generally taking a cautious approach, and are coming in with quite small tickets,» says Mr Jacques. «Investors will be paying close attention to the performance data on transactions, and the quality of deal reporting will have to be very high for Russian banks who are setting up RMBS programmes and intend to become regular issuers.»

There are also efforts to develop a rouble-denominated securitisation market, with deals either sold domestically or to international investors. However, at present only a few international investors have approval for rouble investments, and bankers expect most deals to be in dollars or euros.

Nonetheless, there have been a few deals. In December 2006, Sovfintrade — a leading mortgage refinancing bank and a subsidiary of JSC Gazprombank — sold both rouble and euro tranches, in an offering lead managed by Barclays Capital and Gazprombank.

In addition to Russia, banks from Kazakhstan have over the past two years established themselves as regular ABS issuers, notably with DPR deals from issuers such as Kazkommertsbank, which was about to launch its latest $500m deal in April.

And in March came the first ever public international securitisation of residential mortgage loans.

BTA Ipoteka, the third largest originator of mortgages in Kazakhstan, and a subsidiary of JSC Bank TuranAlem (the second largest bank in the country) sold $141.4m-worth of RMBS, in a deal featuring ABN AMRO as sole lead manager.

Political risk contract

The underlying pool of mortgages are all dollar indexed loans secured in residential property across Kazakhstan. The structure incorporated a political risk interest payment contract, which allowed Fitch to rate the senior notes one notch above the country ceiling of Kazakhstan.

The $123m-worth of notes with a 2.13-year average life, rated A3 by Moody’s and A- by Fitch, priced at 125bp over Libor. The $11.3m-worth of Baa2/BBB rated notes with a four-year average life priced at a 200bp spread. And the Ba2/BB rated Class C notes priced at 375bp.

«The BTA Ipoteka transaction was launched during a period of volatility on the global markets, but was still well received, which illustrates the way in which ABS investors take a longer term view,» says Gary Watmore, head of emerging markets ABS at ABN AMRO.

«About 15 accounts participated across the deal, with the majority of orders coming from ABS investors looking for some diversification in their RMBS portfolios, as well as an attractive yield,» Mr Watmore adds.

«We saw particularly heavy interest from Germany, since German investors have been focused on Kazakhstan for some time.»