Combing the market for unambiguously good news these days often feels like running tap water through a sieve in the hope of trapping gold.
It's just not going to happen.
So I'll tap into yet another vein of pessimism: Russia and Ukraine.
Frozen out of international markets, most of the originators from these countries are struggling to re-finance and keep up lending. They are also showing the macro-effects of a nosedive in prices for energy and manufactured goods, and the situation is only expected to deteriorate. This is knocking around existing-asset deals backed by mortgages, auto loans and consumer loans, and preliminary figures suggest it's starting to rattle DPR transactions as well, although overcollateralization in the future flow space tends to be quite cushy.
While these transactions are getting scratched up from multiple sides, there's one culprit that's proved especially troubling in some deals: currency devaluation.
While their peer in the Commonwealth of Independent States (CIS), Kazakhstan, has held firm to keeping its currency, the tenge, within a fairly narrow band, central bank authorities in Russia and Ukraine have let their currencies drop, lest they deplete their international reserves while fighting a losing battle. (Still, Russia's got plenty of ammunition - its roughly $450 billion in reserves ranks third in the world.)
As of press time, the ruble had dropped 20% against the dollar, and Ukraine's currency, the hryvna, was down about 38%, according to Bloomberg.
What does this mean for ABS? Well, apparently quite a lot.
On the existing-asset front, a slew of deals have suffered negative rating actions over the past several weeks from Fitch Ratings, Moody's Investors Service and Standard & Poor's.
"Most transactions are vulnerable to sharp depreciation in the local currency," said Jaime Sanz, senior director at Fitch, speaking at a late December teleconference on Russian and CIS securitization. The vulnerability stems from the fact that a plummeting local currency makes it costlier for borrowers earning salaries in that currency to make payments on dollar loans.
Among the deals vulnerable to this shock are MBS transactions such as Red & Black Prime Russia (originator: DeltaCredit), CityMortgage (CityMortgage), and Moscow Stars (Moskommertsbank); and auto loan ABS such as Roof Russia (ZAO Raiffeissen), Taganka Car Loan (MDM) and Russian Car Loans (Russian Standard Bank) are exposed as well.
Sanz also raised the specter of governments' re-denominating foreign currency debt, should pressure mount on local currencies. "There's the risk of an imposition of transfer and convertibility restrictions," he said. "Some deals are protected against this, but there's another risk that deals may not be protected against: re-denomination of contracts from foreign to local currency."
Will Russia 2009 become Argentina 2002? The nation long famous for tango and excellent beef added massive defaults to its claims to fame when the government turned dollar contracts to peso contracts in 2002. With the peso down about 2/3 against the dollar from a one-to-one ratio previously, collateral for MBS and other existing asset deals got wiped out, sparking rounds of defaults.
To be sure, there's temptation for Russia to rublize or the Ukraine to hryvnize foreign currency assets. "It slows down the loss of foreign reserves when they are most needed, and reduces the financial burden of strained borrowers," Sanz said.
Its appeal notwithstanding, re-denomination is still considered unlikely. Russia and its neighbors are no doubt keen to avoid the tremendous erosion in global investor confidence that Argentina incurred after its pesification - a loss that the country has yet to turn around, six years later.
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