As if the monoline insurers don't have enough on their minds, they're now facing downgrade reviews from Moody's Investors Service on a slew of structured notes originated by top-tier Kazakh banks Bank TuranAlem (BTA) and Kazkommertsbank (KKB). The deals have underlying ratings at the investment grade cusp of Baa3,' making a potential cut especially painful.
Among the monolines with exposure are FGIC, Ambac and MBIA. One chunk of paper is also wrapped by a triple-A multilateral, the Asian Development Bank. And this doesn't include wraps provided by these and other insurers in the secondary and private markets for DPR transactions from BTA and KKB.
Including unwrapped deals, there's $950 million in notes from KKB and $750 million from BTA that are publicly affected. The originators have told Moody's that they intend to put in place "features which aim to reduce the linkage of the ratings of the notes" to each bank's ratings. A Moody's analyst didn't return a call for comment by press time.
Sources seasoned in the field of future flows said the likely route in tinkering with the structure will involve early amortization triggers along the lines of those present in Kazakh DPR deals and Russian future flows from originators that were lower rated than KKB and BTA. Apart from tightening the existing triggers on debt service coverage ratios for their DPR transaction, the originators could decide to introduce a trigger that would be tripped if the agency cut the local currency ratings of the underlying issuers below a certain level.
The review on the structured deals came after Moody's cut BTA's long-term local currency deposit rating to Ba1' from Baa3,' and KKB's to Ba1' from Baa2.' One example of an early amortization trigger based on the rating of the issuer is found in a $350 million, five-year DPR deal for Russia's MDM Bank. Arranged by Dresdner Kleinwort, the transaction will amortize early if Moody's cuts MDM's long-term deposit rating to Ba2' or lower from Ba1' currently.
"In Russia [this approach] has worked well, since the country is investment grade and the underlying ratings of the banks are not," said a market source familiar with the Russian situation. He added that these rating-based triggers earned a bad name when an economic crisis in Turkey during 2001 forced DPR transactions to amortize early, even though the underlying assets were performing adequately.
"They're unconnected to the performance of the deals," he added, at the same time acknowledging they may be the best way for BTA and KKB to avert fears that their deals could live out the rest of their days in the land of sub-investment grade.
In the Kazakh future flow universe, DPR transactions from ATF Bank and Alliance Bank have traditionally featured stricter triggers on their debt service coverage ratios than comparable deals from KKB and BTA, according to a market source. This was a reflection of ATF's and Alliance's lower underlying ratings.
Now, with the downgrades on KKB and BTA, their future flow structures might end up looking like those of their peers.
While Moody's review has effectively pushed these Kazakh banks to reconsider their future flow structures, Standard & Poor's has held firm on its Kazakh future flow ratings. The agency hasn't made any statements on the matter since early last month, when it issued a release saying that the underlying/unwrapped ratings on BTA's and KKB's DPR deals would remain the same in light of a downgrade for the sovereign.
The agency reduced the rating of Republic of Kazakhstan, a casualty of the global credit crisis, to BBB-' from BBB' on Oct. 8.
BTA kept its BBB-' rating for DPR trades, and KKB kept its BBB,' because "none of the local currency ratings on the underlying borrowers or bank survivability assessments are affected by the sovereign downgrade," S&P said.
According to a presentation by Fitch Ratings, foreign borrowings accounted for 48% of funding for Kazakh banks at the end of the first half of the year. All these issuers have seen their overseas lending costs leap over the past few months.
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