The region encompassing Eastern Europe, the ex-Soviet Union, and the Middle East is expected to continue evolving next year, particularly in existing assets. There's a buzz surrounding Russia, Turkey, Kazakhstan and even parts of the Gulf Region on the potential for securitizing consumer loans, auto loans, and mortgages.
Russia, which in 2005 yielded transactions backed by both ruble-denominated consumer loans and dollar auto loans, could start churning out mortgage deals in 2006, sources said. "It is a challenging legal environment," said David Lautier, vice president at Moody's Investors Service. "But we're going to see more domestic assets, probably RMBS."
Russian mortgages are primarily dollar denominated, but Lautier pointed out that ruble-denominated consumer assets are good candidates as well, with their vast potential for growth. For instance, personal loans as a percentage of GDP is 3.30% in Russia, 8.70% in the Czech Republic, 19.5% in Poland, and 70.5% in the U.K.
The hunt for existing assets is also underway in Turkey, a major supplier of liquidity to the future flows marketplace. "We will likely see the start of existing asset securitization in Turkey next year," said Stefan Bund, managing director in charge of Eastern Europe, Middle East and Africa at Fitch Ratings. "The legislative framework should allow [us] to rate these securitizations." No one however is expecting meaningful volumes in 2006. "Two existing asset deals [out of Turkey] would be a success," Bund added. In an impetus to RMBS, a new Turkish mortgage law expressly designed to encourage securitization is expected to take effect in early 2006.
Setting it apart from Mexico and Brazil, Turkey's domestic market is deemed too thin to absorb bond deals. The first transactions, then, are expected to cross the border. Those deals will likely carry enhancements to mitigate transfer and convertibility risk, particularly if the idea is to attract monoline insurers. The question facing players is: at what point do added costs become a deal-breaker for originators? Turkish banks already fund at lower rates than the sovereign, making them a rarity in emerging markets, and notoriously tough hagglers, a source said. While famished for Turkish lira financing, local banks will not, of course, accept it at any cost.
In Kazakhstan, local assets, namely auto loans and mortgages, are also on the minds of players. "There's enthusiasm on the ground for doing that," said Lautier, referring to Kazakh originators.
Unlike Turkey, sources said that Kazakhstan has domestic liquidity. Flush with cash thanks to a booming energy-rich economy, local investors are actually on the prowl for more instruments to snap up.
Securitizations from Eastern and Central Europe have been few and far between, but sources said that the consumer and mortgage business might yield deals next year. "There have been quite a few inquiries," said Bund, adding that banks in Poland, the Czech Republic and Hungary are sniffing around.
In the Gulf Region, originators are looking to tap mortgages and consumer loans in both U.S. dollars and local currency.
In the future flows arena Turkey will continue to reign. The country produced an unprecedented volume of transactions backed by diversified payment rights this year and, while some are skeptical that issuance will stay as robust next year, all signs point to brisk activity. "The Turkish banks still have capacity" in their DPR programs, said a source at a monoline insurer. The assets underpinning this sector - electronic money payments for a range of goods and services - are also experiencing strong growth, while banks that have yet to issue a DPR transaction are understood to be making overtures. The potential drop in volume is because 2005 was, in the words of one source, "a gangbuster year", having been the first full year that the leading Turkish banks could secure an investment grade rating from Standard & Poor's. That event lured a stable of monoline insurers into the sector for the first time.
Kazakhstan has recently caught the attention of the structured finance world with Kazkommertsbank's - and the country's - first DPR deal in the capital markets. More is forecast from the top three banks.
Elsewhere, future flows from Russia have turned out to be a disappointment for some. Last year's gargantuan Gazprom transaction was followed by a couple of much smaller credit card deals from Rosbank and nothing else. Vneshtorgbank and Alfabank are still expected to come out with DPR transactions - even though a recent upgrade for the former has reportedly made the economics less attractive. "There have been issues of price compared to straight corporate risk," said one banker familiar with the country. And, as in Brazil, heady commodity prices have enabled exporters to avoid the structured route.
Something similar is happening among banks in the Gulf Region. "What we don't expect are any DPRs out of the Middle East because the banks are so cash rich," Bund said.
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