When the market was in good shape, it drew a parade of Russian lenders keen to finance their brisk clip of mortgage origination.

But KIT Finance, formerly known as CIT Finance, did not join them, having started its mortgage business only in 2005. Still marching to its own beat, the originator made its debut in RMBS last April, even as the market's pulse was scarcely perceptible and the bank's peers steered away from issuance. Then the originator was at it again in June, placing its second ruble deal in a climate hardly any sunnier than two months earlier.

It is unclear whether the more recent transaction, called KIT Ipoteka, was actually sold to institutional investors - arranger Goldman Sachs International declined to comment on the matter. Nevertheless, the choices made in the deal's architecture speak to changes in the marketplace since mid-2007.

Amounting to RUR4.75 billion ($203 million), the A notes of KIT Ipoteka bear a coupon of 13.15%. An overcollateralization of 40%, on top of a 1.47% reserve fund, provide enhancement. Standard & Poor's rated the A piece BBB+' and ruAAA' on the national scale.

With 93% of KIT's mortgage book denominated in rubles, it might seem only natural that the bank would opt for the Russian currency in its transaction. But other factors also played into its decision to pick ruble paper. "The investor base has pretty much changed since June [of] last year, and investors expect a higher yield," said KIT Chief Financial Officer Dmitry Romaev. "[The] securitized portfolio contains ruble fixed rated mortgages allowing to economize on the swaps and maximize yield on the notes."

The local currency also allows cross-border investors comfortable with ruble risk to bet on the Russian currency's appreciation. "Most analysts expect gradual ruble appreciation against the [dollar and euro] basket over the next 24 months," Romaev added.

In a departure from the bank's first transaction - which was arranged by Morgan Stanley - KIT Ipoteka does not feature a rated mezzanine tranche. Subordinated notes amounting to RUR130 million were used to originate a reserve fund. In the first deal, called RUMBA, a BBB+'-rated senior tranche of RUR5.4 billion was enhanced by a BB'-rated mezzanine piece. "The new structure was tailor-made for the needs of the particular investors," Romaev said.

It wasn't clear whether these investors had already bought into the deal or rather formed the target audience for eventual distribution once market conditions improve.

RUMBA and KIT Ipoteka do share one salient trait: a single rating. Perhaps in a sign of the times, KIT doesn't see the value of paying for more than one rating. "Investors now prefer to analyze the portfolio on a loan-by-loan basis themselves regardless of the rating agency opinions," Romaev said. "One rating suffices to establish a preliminary position [on] the notes."

As of closing on June 11, the loans in KIT Ipoteka had an average LTV of slightly below 69%, while the average loan balance was RUR1.38 million. There were 6,165 loans in the pool, with a weighted-average seasoning of 8.2 months and a remaining weighted-average life of 18.7 years. All the loans are denominated in rubles and are fixed rate as well, bearing an average rate of 11.3%.

According to S&P, the pool is reasonably well diversified, with St. Petersburg accounting for 12.96%, the largest concentration.

The next transaction envisaged by KIT may turn out to be entirely home-based. "We contemplate a domestic Russian law RMBS deal within the next six months," Romaev said. "That would allow us

to reach more Russian institutional investors that have regulatory restrictions to invest [in] Eurobonds."

The bank may be bold under the current circumstances, but it does not have any current plans to venture beyond mortgages, Romaev said. "We believe that until the securitization market fully recovers, other businesses can be financed with cheaper sources since shorter-[term] funding is required," he added.

KIT Finance is headquartered in St. Petersburg. It started up in 2001 when the Internet brokerage Web-Invest acquired Palmira, a bank. KIT chiefly operates in securities trading, brokerage, investment banking, finance leasing and asset management.

At the end of 2007, KIT's mortgage book totaled over $1 billion. The bank has grown its portfolio through origination and the purchase of pools from other banks. All the loans in KIT Ipoteka were self-originated.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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