By the end of last week, the Baltic country of Latvia was expected to have priced an RMBS for about $63.6 million, the first of its kind in Central Europe, according to sources. Wachovia Securities is the arranger and Moody's Investors Service has given the deal preliminary ratings of Aa2' to a senior tranche - sized at $60.1 million - and Baa1' to a $3.6 million subordinated piece, both with projected legal final maturities of 22 years. Apparently no other agency is rating the bond, originated by a Delaware-based nonprofit, the Baltic American Enterprise Fund (BalAEF).

The deal appears to be part of a $250 million securitization program described on the Web site of the International Finance Corp., an arm of the World Bank. The multilateral will invest up to $43 million in the three-year program. The IFC is already committed to snapping up the subordinated tranche of the current transaction, according to a well-placed source.

Rated investment-grade at A2', Latvia stands a few notches below the RMBS. A political risk insurance (PRI) policy from the Multilateral Guarantee Agency - another member of the World Bank group - was key in hoisting the deal beyond the sovereign, according to one well-placed source.

The PRI protects investors from payment blockage caused by government-imposed capital controls, such as restrictions on overseas currency transfers. In the Latvian transaction, it includes certain types of expropriation as well. This brand of surety has been making a comeback since it fell out of favor following the Argentine financial collapse in 2002. The default of the PRI-backed transactions initially soured many investors on the instrument, particularly those that might have had an inflated view of what the policy covers. Since late 2003, the PRI has been popping up again in Latin America and more recently, in Turkey, with investors better informed of its advantages and limitations, particularly compared to other kinds of guarantees.

Additional enhancements on the Latvian RMBS noted in a Moody's release are the role of Latvijas Unibanka as backup servicer and the subordinated piece. Latvijas Unibanka is part of the SEB Group, a family of financial institutions spread through Sweden, Germany and the Baltic States.

The originator of the deal, BalAEF, was initially set up in 1994 by the U.S. government. "[Its] mission is to promote the development of a market economy - and specifically a mortgage market - in the Baltic Region," Moody's said in its release. BalAEF's main office in the Latvian capital of Riga.

The mortgages backing BalAEF's debut RMBS are 20 year, 12-month ARMs. While Latvia continues to use the lat as its national currency, there is no denomination mismatch between the underlying collateral and the bond, as the mortgages are in U.S. dollars. "In the Latvian economy, the dollar still flies," said one source familiar with the RMBS. But the greenback's stature is unlikely to hold, as the country further integrates into the European Union, which it joined earlier this year. Currently pegged to a basket of currencies, the lat will be pegged only to the euro beginning Jan. 1, 2005.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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