Although Poland has seen a few domestic securitization programs, until now it had not seen a deal that had achieved ratings to international standards. "The first structured finance transaction, which has been structured to international standards, emerged from Poland this month," says Arkadiusz Wicik, analyst at Fitch Ratings.

The deal referenced is DTC Real Estate Finance SP. z.o.o, which has been arranged by ABN AMRO Poland and EPH-EBK, a local Polish bank and subsidiary of HypoVereinsbank. DTC Real Estate was issued with only one class, amounting to 320 million Polish zlotys (US$83.70 million) and was rated BBB' by Fitch. DTC Real Estate Finance also represents the first commercial mortgage-backed securitization to be rated in Poland.

The originator, DTC RE, is a property investment company operating in Poland. DTC RE owns a portfolio of 12 department stores, located in the central areas of the largest Polish cities. The company DTC RE was formed in 1998 by the privatization of a state-owned entity, and in 1998 Eastbridge NV, a Dutch company, purchased a 68% stake. The property pool is concentrated in the Warsaw market, where 40.9% of DTC RE-leased space generated 59.8% of the company's cash flow.

The 12 properties were valued at E128 million (US$147.76 million) by an independent real estate company, DTZ Polska, in March 2003. The retail companies of the Eastbridge Group are the major tenants in the securitization and represent 69% of the annual rents. The five largest tenants account for 75.9% of the total income.

The collateral consists of the 12 commercial properties (Real Properties). At closing, the issuer will issue the bonds, the proceeds from which will be used to purchase bonds issued by DTC RE. The funds raised will be used for refinancing existing debt under a syndicated loan agreement.

According to Fitch, the first round of bonds will be secured by a pledge on the DTC RE bonds, which will in turn be secured by mortgages over the Real Properties - an ordinary pledge on rent receivables from the Real Properties and registered pledges over the shares and enterprise of DTC RE.

Though 68.8% of income is received from tenants with a common holding parent company, the agency concluded that the default of any one subsidiary or the parent company would not cause the default of any of the other subsidiaries.

"We don't believe that a conflict is now present," explained Andrew Currie at Fitch. "When the portfolio was initially purchased, it was held in a single company; however, now these have been separated out legally, as we understand it, the default of one subsidiary, or indeed the parent, would not cause problems to the other companies in the securitization."

Although the companies are not formally rated, Fitch emphasized that their financial strength is not consistent with investment-grade credits. "In our analysis we have assumed that two of the largest tenants will default at the start of the transaction to reflect the relatively weak financial standing of each of the individual tenants and the concentrated nature of the rental income," says Currie. This simulates the impact of these companies collapsing simultaneously.

"We were initially concerned that insolvency proceedings against any one of the subsidiaries of Eastbridge or the holding company itself would trigger the insolvency of the other related companies," Currie said. "We have received confirmation that this would not now occur. However each of the companies on their own is not financially strong, and there is significant concentration in the sources of rental income. Therefore, in our BBB' stress case we have assumed that the two tenants who contribute the most rent default at the start of the transaction. This tests the resilience of the cash flows to the default of the principal tenants."

Another issue set out in the Fitch pre-sale report is a number of court proceedings currently in progress to regularize the legal ownership of the 12 commercial properties in the securitization. Fitch adds that they have been informed that these are expected to be resolved in favor of DTC RE, although the time line for completion is uncertain.

As Currie explained, "There are legal proceedings under way that relate to the legal title of three of the assets in the securitization. We understand that the ongoing court proceedings have the aim of regularizing the ownership title, which is in practice not in dispute."

"Although these issues will not be resolved before the closing of the transaction, we are informed that the resulting uncertainty does not significantly impact the strength of the security available to bond holders," says Currie at Fitch.

Securitization prospects

What are the future prospects for securitization in Poland? Although there are some very real hurdles to certain types of securitization, there is also a growing interest in the product.

There are still many outstanding legal and tax issues (see ASR 03/24) that continue to hamper securitization, but things are moving in the right direction. Last year, a task group of banks affiliated with the Association of Polish Banks, together with Polish legal counsel, presented a securitization prospectus to the National Bank of Poland and Banking Supervision proposing changes to the law that would ease the process of securitizing bank assets.

Fitch says in its report on Securitization in Poland (December 2002) that despite the underdeveloped nature of securitization in the country, transactions are still possible. Fitch acknowledges, however, that structuring is more complex than in countries with tailor-made legal systems.

In the past, there have been three domestic-rated asset-backed commercial paper programs, which have securitized receivables due from Polish hospitals to providers of medicines and medical products.

Fitch says that over the last few years, in line with the expanding Polish economy, bank assets have increased significantly. A fast growth in consumer spending and associated consumer credit (auto loans, personal loans and credit cards) may provide positive opportunities for consumer asset-backed securitizations.

Fitch also reports that preparations are underway for an agency similar to a U.S. government-sponsored enterprise, such as Fannie Mae, which would enable the launch of RMBS securitization in Poland.

According to Fitch's Wicik, there is a definite interest in other types of securitization, although he believes that there will be few other candidates for CMBS, as not many issuers have the benefit of the good quality assets and long leases that are present in this transaction. "Although there could be some office and retail properties which could be suitable," says Wicik.

"There are other assets also being considered, such as trade receivables and municipal bond portfolios," Wicik added. "Public hospitals are also being considered; these often carry a very heavy debt burden, and the government is said to be considering a possible securitization deal in this sector."

Public and project finance could also be a fertile ground for securitizations. This could see the development of new infrastructure and the improvement of existing amenities - highways, toll roads, utility providers, telecoms and even the lottery could be candidates, confirms Fitch. It also seems that the Polish power grid operator, Polskie Sieci Elektronenergetyczne (PSE), is trying to structure a US$1.5 billion securitization backed by a new tax paid by electricity consumers.

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