ABN AMRO has crafted the first true sale of Kazakh mortgages to a cross-border SPV, paving the way for an RMBS that could turn out to be Kazakhstan's first in the capital markets.

The vehicle, dubbed the First Kazakh Securitization Company, has been snapping up loans originated by BTA-Ipoteka, a unit of Turan Alem, one of Kazakhstan's three leading commercial banks. An ABN conduit finances the purchases. When First Kazakh hits critical mass a bond will be issued, now slated for the end of the second quarter, according to a source close to the deal. The Multilateral Investment Guarantee Agency, an arm of the World Bank Group, is providing political risk insurance on the loans for up to $75 million, according to Olga Sclovscaia, senior underwriter at MIGA. The agency can increase the coverage.

"The amount wasn't driven by our country limit. It was decided and discussed with the arrangers," she said.

A source close to the deal said the volume of funding that BTA-Ipoteka can secure from ABN's conduit is $150 million. No information was available at press time regarding the loan volume that had been sold so far.

In MIGA's last transaction, a mortgage deal out of Latvia, the PRI covered the risks of currency transfer restrictions - which in the case of emerging markets typically means capital controls - and certain types of expropriation. The coverage cap on that deal was $10 million, the amount needed to cover interest payments during a political default event lasting 18 months.

Sclovscaia declined to detail the terms of the First Kazakh policy.

PRI generally fell into disfavor following Argentina's cataclysmic devaluation in late 2001. Deals backed by the policy, such as those issued by utilities Edenor and TGN, defaulted, alerting investors to the limited coverage provided by this type of insurance. But the policy has made a comeback beginning in mid-2003, as investors dug themselves out of the avalanche of Argentine defaults and gained a better understanding of PRI.

The mortgages flowing into First Kazakh are tenge-denominated, but indexed to dollars, which, according to the source close to the deal, remains the dominant denomination of mortgages in Kazakhstan. However, pure dollar loans, he added, are growing more popular. BTA-Ipoteka's loans tend to have average lives of about six years and can have legal finals of up to 20 years.

"Quite often the borrower buys an apartment and wants to renovate everything inside," which they finance with a mortgage of relatively short maturity by global standards, said the source close to the deal. Most of the borrowers are middle to upper-middle class.

Bankers and foreign investors have been growing comfortable with Kazakhstan's legal system, which often draws favorable comparisons to Russia's.

"The court system is more reliable than we might be predisposed to think," said one lawyer, referring to the Wild West image that players have of the legal arena in other post-Soviet republics.

Nevertheless, homeownership is relatively new to Kazakhstan and mortgages were nearly unheard of before 2000. A track record this thin raises challenges.

"You have this additional concern: How do you foreclose a mortgage [in Kazakhstan]?" the lawyer said.

Nevertheless, players note there is both the political and legal will to build a viable marketplace of mortgages and RMBS.

"They genuinely want to learn and figure out how it's done," said a London-based banker with no ties to the transaction.

A report issued by the United States Agency for International Development in October 2005 projected that the volume of Kazakh mortgages would hit $1 billion by the end of last year and reach between $1.4 billion and $1.5 billion in 2006. BTA-Ipoteka has about 22% market share, according to the source close to the deal. Mortgage growth is moving along with the country's stellar economic performance. Propelled by an energy boom, Kazakh real GDP is projected to soar 9.5% this year, following double-digit rates in 2005 and 2004, according to Moody's Investors Service.

Like other participants active in Kazakhstan, MIGA is eying other countries in the region.

"We're very interested in Russia and Turkey," Sclovscaia said. "We are looking at a number of originators in those countries."

She added that eligible assets are not limited to mortgages, with loans to small and medium-sized companies as well as leases on MIGA's radar.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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