Emerging markets have stumbled into a volatile patch, with some leading stock indices and currencies down by double-digit rates over the last few weeks. But ABS from the Eurasian corner of the EM world seems undeterred, thanks in no small part to firm monoline appetite.

Kazakhstan's Kazkommerstbank (KKB) closed a $200 million wrapped bond backed by diversified payment rights (DPRs) last week, while Turkiye Vakiflar Bankasi (Vakifbank) will soon print DPR paper for $815 million, according to sources.

KKB's deal, led by WestLB, was split evenly between an A and B tranche, both with a seven-year final/5.1 average life. FGIC wrapped the A piece and Ambac insured the B piece. The entire transaction priced at 24 basis points over three-month Libor.

Naturally, Moody's Investors Service and Standard & Poor's rated the deal triple-A. The underlying ratings, meanwhile, are BBB' and Baa1', respectively.

Pricing came to five basis points inside the wrapped piece of KKB's debut DPR last December. Bolstering demand were investors' deeper familiarity with the bank the second time around and the insulation of triple-A product from the broader rout in emerging financial markets, said sources close to the deal.

The transaction is the second off a program. The first was KKB's maiden DPR transaction, a $300 million, seven-year final deal, with a $200 million senior tranche and two unwrapped $50 million tranches.

The 2005-C piece - one of the $50 million tranches - was programmed for an early retirement, to be financed by the more recent deal, according to an S&P report. That provides a further testament to the monolines' solid appetite for this asset class, as cost must have informed the decision to swap one paper for another.

DPRs consist of payment orders processed through the bank. They stem from trade, foreign direct investment, and interest income payments. The KKB structure has designated Citibank, The Bank of New York, JPMorgan Chase Bank, and American Express Bank as the depository banks under the structure. These four banks represent 96.3% of KKB's DPR flows.

According to S&P, in an unstressed scenario, the debt service coverage ratio for the deal hovers at 22 times.

The generation of payment orders is a critical business for KKB and a key source of income for the Kazakh economy, as exports and FDI haveplayed a paramount role in growth. Exports totaled $27.8 billion in 2005, while FDI reached over $6.2 billion.

S&P's survivability assessment for the bank is two notches above its local currency rating. The agency raised KKB's long-term counterparty credit rating to BB+' and BB' in February, an upgrade prompted by the agency's view that the government would bolster KKB in a distressed scenario. An S&P analyst said that the survivability assessment - which underpins the rating of the bank's DPR transactions - was untouched by the upgrade, as that gauge had already factored in potential government support.

The payment orders processed by KKB hit $4.1 billion in 2005, with 87% of those denominated in U.S. dollars. A percentage of the dollar DPR flows are payment orders issued by onshore Kazakh financial institutions for KKB's clients in Kazakhstan, which are transferred through the relevant US clearing depositary banks. Kazkh flows took up 18% of KKB's DPRs between August 2002 and March 2006. Because the onshore flows are more vulnerable to sovereign risk, Moody's gives only partial credit for these flows when calculating the DSCR. S&P goes a step further and entirely excludes Kazakh flows from its assessment of the DSCR.

Vakifbank launches

Meanwhile, Turkiye Vakiflar Bankasi (Vakifbank) is prepping an $815 million deal backed by DPRs and involving a host of monoline insurers, according to sources close to the transaction. MBIA is wrapping $250 million; Ambac, $200 million; FGIC, $150 million; and Radian, $115 million. A 2006E tranche for $100 million is coming unwrapped. Final maturities will be between seven and eight years for all notes, a source said.

Joint bookrunners WestLB and Standard Chartered have launched the transaction and are timed to begin the road show "shortly," according to a source close the deal.

The same two banks arranged a $750 million DPR transaction for Vakifbank last June. That deal was private, with pricing undisclosed.

Vakifbank is owned by the Turkish state via the General Directorate of Foundations. The bank launched its first IPO in 2005, which raised 1.5 billion Turkish lira ($971 million) for a 25% stake. The idea is to gradually dilute GDF's stake, and thereby privatize the bank, through IPOs, S&P said.

Vakifbank was Turkey's fifth largest bank by assets at the end of June 2005, according to Fitch Ratings. At the end of 2005, the bank had a 9.1% share of the Turkish deposit market and 7.8% of loans. Asset growth at Vakifbank has boomed recently, with the steepest increases in retail and SME loans.

The market turmoil that has rattled emerging markets over the last few weeks has sent the Turkish lira plunging. The currency slid 15% against the dollar, a depreciation triggered by fears that Turkish inflation and the current account deficit were on the upswing, while higher interest rates in the U.S. would sour investors on emerging markets. Political tremors in Turkey have further exacerbated matters.

One source said that the correction in the lira was long overdue and that participants were optimistic that the currency weakness would narrow the current account deficit by boosting exports. Inflation in Turkey hit 8.8% in April, which is a 10-month high.

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

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