When it comes to structured finance, the ex-Soviet Union is becoming what Mexico was a few years ago, as the region's infant structured finance area is undergoing a growth spurt with a number of debuts. Last week, Kazakhstan closed its first-ever public RMBS, while Societe Generale threw its hat into the Russian existing-asset ring.
Originated by BTA Ipoteka (BTAI), a unit of TuranAlem, the Kazakh deal breezed by the subprime tornado rattling the U.S., but its association with emerging markets incurred a cost, according to a source familiar with the transaction. ABN AMRO was the sole lead (ASR, 3/5/07).
"[There was] no mention of the U.S. mortgage meltdown, but more consideration [was given] to the difficult markets for emerging market issuers," the source said.
The RMBS was split into three tranches. A $123 million A tranche with a 2.13-year weighted average life priced at 125 basis points over one-month Libor. Fitch Ratings and Moody's Investors Service rated that piece A-' and A3', respectively. An $11.3 million B tranche with a four-year average life priced at 200 basis points over and was rated BBB' and Baa2'. Finally, $7.1 million in C notes with a four-year average life priced at 375 basis points over and stood at BB' and Ba2'.
The Class A notes went to a combination of emerging-market and traditional ABS investors, while the B and C notes ended up primarily with hedge funds, the source said.
A comparable that the lead used for the A notes was a $74.2 million RMBS with a 3.6-year average life issued by Vneshtorgbank (VTB) in early July, the first mortgage-backed deal from a Russian originator. Typical for a nascent market, the comp was imperfect, with Fitch and Moody's rating the VTB deal BBB+' and A1' at issuance, unlike BTAI's grades of A-' and A3' for the A notes.
Still, the pricing differential is telling. VTB priced at 100 basis points over one-month Libor, which is 25 points tighter than BTAI's A tranche, a signal that retreating liquidity for emerging markets is pressuring spreads in the ABS/MBS business as well. This theory holds even more validity if one considers that investors have had several months to get acquainted with RMBS from the ex-Soviet Union, a process that would tend to tighten spreads when the investment climate holds constant.
The B paper, meanwhile, priced at the same spread as the senior chunk of a $134 million RMBS issued by the Ukraine's PrivatBank in February, even though both Fitch and Moody's rated the BTAI tranche a notch higher. Given that the Ukraine transaction came ahead of the recent bout of volatility, the comparison could also suggest that spreads are now under a bit more pressure.
Meanwhile, sole lead SocGen started road-showing last week with a Reg S RMBS for its Russian unit DeltaCredit Bank, the arranger's first foray into collateralizing Russian existing assets in the public market.
The deal consists of a $180.9 million A piece, a $15.1 million B piece, and a $19 million C piece, whose respective ratings by Moody's are A2', Baa2' and Ba2'. All tranches have a legal final of 28 years.
At the cutoff date of Feb. 3, the collateral was made up of 3,174 loans with an average size of $68 million and a current LTV of 65%. By volume, 57% of the underlying mortgages are on properties located in Moscow, and another 25% are on properties in the Moscow region. The vast majority of the loans are fixed-rate.
A swap provided by SocGen will mitigate the interest-rate risk. There is, however, foreign exchange risk. While the mortgages are denominated in dollars, some of the borrowers earn their income in rubles. It follows that a precipitous drop in the value of the Russian currency could trigger defaults among those homeowners as their mortgage payments balloon on a ruble basis.
In its report, Moody's specified that DeltaCredit Bank only focuses on prime borrowers. The deal is the fifth public RMBS from Russia.
The Russian Crisis of about 10 years ago basically forced DeltaCredit to shut down operations in 1998. It started up again in 2001 with funding from the International Finance Corp. and the European Bank for Reconstruction and Development.
In a recent research report, SocGen predicted that issuance of securitized deals from Russia would double in 2007 from the $4 billion equivalent posted last year. The report also said that, notwithstanding the risks associated with Russia's untested legal environment and other hazards, the spread margin against RMBS from western European countries looked "comfortable." The pricing of Russian RMBS "brings us back to a couple of years ago, when prime RMBS transactions from western European countries offered similar spreads," the report said.
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