Covered bonds are a part of the Russian mortgage-finance market's comeback with a possible deal for 2011.

Societe Generale unit Delta Credit has plans to debut an issue next year. But for banks rated at the Russian sovereign ceiling, the product might not provide the ratings uplift that is available in other countries, sources said.

In the case of the RUR15 billion ($502.5 million) in five-year covered bonds issued last year by VTB24, Moody's Investors Service gave the transaction 'Baa1' — the same rating it has on the bank.

The agency granted only "limited consideration to the underlying collateral pool," Moody's said. But investors naturally can decide for themselves whether the added security is worth a potential premium.

For its part, the VTB24 deal was sold not only to state development bank Vnesheconombank (VEB) and AHML, but also to a few domestic investors in the private sector. AHML is an agency whose primary mandate is to purchase ruble-denominated mortgages from bank and nonbank originators from across the country and package them into RMBS.

Other originators apart from Delta Credit are eyeing this alternative as well.

"We consider covered bond issuance as one of the tools in our funding armory, which has good chances to be used if the price is attractive," said Gazprombank's Executive Director of Structured and Syndicated Finance Ignat Dirks. "On balance, we believe that issuing a covered bond is an attractive route for established issuers, which allows [them] to tap certain pockets of money bound by institutional restrictions, such as pension funds."

Apart from seeking ways to stimulate mortgage via bond issues, the government is also fomenting origination more directly. Banks that receive government support, for instance, must provide loans with rates at or below 11%.

In addition, a RUR150 billion program set up by VEB is specifically aimed at spurring construction. The funds are earmarked for RMBS and covered bonds backed by mortgages on only new properties. The impact could be far-reaching, sources said.

"Applying very straight-forward math, assuming VEB will be buying 70% of senior tranches, which carry 10% credit enhancement, that will bring about RUR238 billion of new money to the property market," Dirks said. "Assuming an average property price in Russia of RUR47,700 a square meter, that brings us to almost five million square meters of new housing."

ASR's August edition has a full feature on the Russian mortgage market, which includes this excerpt. For the full report, please click here.

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