In past years at the Global ABS conference in Barcelona, emerging-markets panels were held on the final day of the show, and often the panelists outnumbered audience members.
Recent interest and a few breakthrough deals in emerging markets, however, scored this year's panel prime billing and a full crowd.
"This is the first time we have had the panel not on the last day of the conference, and that may have something to do with the spreads we are seeing in the market right now," said one speaker at last Wednesday's panel focusing on Turkey and Eastern Europe. While talk was lighthearted to start the session, speakers soon got down to business highlighting some of the latest securitization developments seen from the region in the past year.
The Czech Republic ended 2003 with its first revolving credit card deal, from issuer Home Credit Finance. The structure also allows for flexible future issuance from the established SPV, said one panelist. "It's the first full-scale cash-receivable deal done from that region," he said. "Home Credit also has a consumer loan business that can be included in future structures."
Because of the challenges for emerging-market deals, Home Credit's success and the structural nuances are being used to facilitate other emerging-market transactions.
For starters, most of these countries have no existing law that deals with the treatment of securitization structures. In the case of this Czech deal, it was the first time the true- sale issue was brought up.
"The ratings agency took a long look at Home Credit's ability to service these assets throughout the life of the deal," said one panelist. One of the biggest hurdles was establishing a method for the daily assignment of the receivables. In the end, structurers employed an advanced legislature on electronic signatures, a panelist explained.
Home Finance implemented a master trust-style framework similar to the technology employed in U.S. and U.K. revolving credit card structures. Home Credit assigns receivables to a Dutch SPV and in the future the asset purchase SPV can issue new notes to new Dutch SPVs that are sold to investors off of the same platform.
Now that the Czech Republic has entered the European Union, there is even more potential for securitization. "Given that the rating agencies are now generally comfortable with the basic framework of securitization in the Czech Republic, one may expect a significant increase in the number of transactions coming to the market in the near term," said Christopher Lewis, a partner at Simmons and Simmons and a panelist at this year's conference.
Panelists believe Poland may hold some promise for securitization. The cost involved in structuring a deal has been one of the hurdles to growth in the emerging markets. The challenge is finding individual companies that have the necessary assets to make it worthwhile.
Structurers and attorneys are still mulling over the legal challenges in Polish legislation. The country saw its first commercial mortgage-backed securitization structured to international standards last year, DTC Real Estate Finance (see ASR 7/7/03). It's the first deal to be rated out of the region, and it achieved a BBB' rating from Fitch Ratings. Upon its ascension to the European Union in May this year, Poland also introduced an amendment to its banking law that introduced specific regulations facilitating the securitization of bank assets (see ASR 4/26/04). The law would only apply specifically to the securitization of bank receivables and would not be applied to non-bank originators. The country is currently working on the Securitization Act, which would remove any of the existing legal hurdles still present under Polish law, but it's still uncertain when it will become law, said panelists.
"There are rumors of a large utility deal from Poland but it's probably the only deal of any significant size that we will see coming from there at the moment," said one panel participant.
Turkey and points east...
While other Eastern European countries are moving toward more traditional securitization - building structures to monetize existing financial assets - the activity in Turkey and Kazakhstan has largely been limited to future-flow structures.
Currently, Turkey is ranked among the largest issuers of future-flow paper, considered second only to Latin American countries for this type of securitization.
"In 2003, over 40% of the deals emerging from Turkey were wrapped, " said one panelist. It's rumored that Ambac is looking at opportunities in the country, specifically at an eight-year deal, which is longer than deals done in the past.
Panelists agreed that a good year is in store for the region both on a wrapped and unwrapped basis. "Turkey is a market with sympathy to securitizations and, with the country's pending ascension to the European Union, it's likely to create a greater potential for structuring assets going forward," said one speaker.
WestLB led the first deal from Kazakhstan this year, which panelists said should promote a transition to Russian securitization deals. "We still need to get a decent true- sale opinion," said one speaker. "At the moment, we have a repatriation opinion that makes structuring ABS tricky because it leaves it open to questions from the sovereign."
Under current Russian legislation, if a company became insolvent, bankruptcy law may allow the courts to consider the clawback of previously sold assets into the bankruptcy estate if they were sold six months prior to the bankruptcy for non-bank entities. For bank entities, assets sold three months back would be fair game. The receivables sold by an originator to an SPV will not automatically be bankruptcy-remote, reports Fitch Ratings in a recent outlook paper on the country. "Any law is subject to great uncertainty because it's not been tested," said one panelist. "You could have a gold-plated structure but it doesn't guarantee that the courts will understand it or that they won't have an unbiased opinion."
For deals to work, investors will need to be comfortable with the laws. At the moment, it's looking more likely that structures will be backed by future flows coming from outside of the country where there is no real need to depend on the Russian courts. Most transactions in Turkey have been associated with bank entities. There is a general understanding that the sovereign will step in and back its banks before watching them fail.
"In Russia, it's more likely that a corporate deal will happen first from its export receivables, where there is a larger base of companies that can do these structures," said one panelist. Currently in the works is a new securitizations-specific law that focuses on the Russian domestic mortgage market, but it may also include legislation on non-mortgage securitization. It's expected for sometime next year, said panelists.
"From the Japanese angle, we are seeing lots of interest because these investors have a good history of going through a crisis," said one panelist. "Russia is changing, but it's not long since it last defaulted, and I think the concern is whether there will be a reversal trend."
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