For 2007, Russia, Turkey and Kazakhstan will keep yielding the kind of fruit craved by players in structured finance. In Russia, in particular, sources said, expect a bumper crop.
That country emerged, or rather erupted, as an epicenter of structured product this year, and players say the flow will only pick up. "Russia is increasingly stable," said David McCaig, head of asset securitization at WestLB Capital Markets. "We've got rising levels of asset performance and investor acceptance - it's just going to be a continuing theme." That theme will resonate with more and more players as origination volumes rise, new issuers materialize, and untapped asset classes come on line, sources said.
"We're expecting to get more diversification out of Russia, both in terms of asset classes and originators" said Christophe De Noaillat, vice president at Moody's Investors Service. He mentioned revolving credit card deals as one potentially new area in addition to auto loans, consumer loans and mortgages, all collateralized this year. Other sources threw out the possibility of CLOs and commercial MBS, which have yet to appear, and leases, which yielded only one transaction last year.
Existing assets from Russia are making the most noise, not least because originators are eager to shuffle assets off their books and generate more in a climate of ravenous demand for consumer credit, mortgages, and just about any other asset buoyed by brisk domestic growth. In the eyes of some, that's exposed on shortcoming: the legal sphere.
Mortgages are a case in point. Despite bustling RMBS activity this year and the heavier volumes in the sector expected in 2007, a three-year old mortgage law is far from perfect, sources said. "The paperwork in connection with a mortgage deal is outrageous," said Vladimir Dragunov, a partner at Baker & McKenzie's Moscow office. The law has been amended several times since it was enacted in November 2003 and could easily be again as more RMBS come out, he added.
A more comprehensive law on securitization is on the agenda and many players are optimistic about it. This new legislation, now in the form of a bundle of draft laws, would make structuring deals in both the local and crossborder markets easier, Dragunov said.
Legal uncertainty is one of a host of reasons that monolines haven't wrapped a Russian structured deal and their presence in any significant way is unlikely next year, according to one guarantor source. "The legal framework in Russia is new, untested and different from what you'd see [in other markets] in its ability to get a true sale opinion," he said. "They have a different profile of what the monolines have traditionally looked for in emerging markets."
Turkey, meanwhile, will keep providing fodder for arrangers structuring deals backed by banks' diversified payment rights (DPR), sources said.
"It's a tried, tested and important source of funding," said one market source. Monolines have been a major driver of Turkish DPR activity and they haven't hit their constraints, despite the heavy exposure they've taken on in the last two years, sources said. One pointed out that amortization will enable monolines to swallow more deals without having much of an impact on their overall investment in the sector.
On the export receivables front, Turkey will remain a non-entity, thanks to a law that mandates exporters bring 70% of their foreign revenue onshore. The existing asset side doesn't look too promising either for next year. Domestic interest rates skyrocketed in May of last year and are hovering at levels that make mortgages unpalatable to borrowers, sources said. Until they come down, Turkish RMBS will stay out of reach.
Finally, Kazakhstan, which produced three DPR deals last year, looks ripe for existing asset deals as well, according to sources, who foresaw deals next year backed by auto loan and mortgages.
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