The emerging markets of Europe, Middle East, Africa and the Commonwealth of Independent States witnessed a 23% drop in structured finance issuance last year to $7.69 billion, according to a report by Moody's Investors Service.
With brisk growth propelling certain countries forward in the first half of the year, most stagnated in the second half. The agency held out hope for 2008.
"Very few deals could be brought to market in 4Q07, but many transactions were initiated and structured during the period," Moody's said. The message was that if investors and originators can meet eye-to-eye on pricing, then issuance should resume.
The higher relative yields and healthy performance of these markets vis-a-vis the developed world doesn't guarantee that cross-border investors will return to issuance from newcomer Russia or more established Turkey with the same conviction of the last few years. The agency suggested the region might be facing a paradox. No one foresees the rate of defaults or write-downs seen in the West, and the intermediate- to long-term appetite for many assets in these emerging markets is nothing short of ravenous, but buysiders might wait for conditions to improve first in the developed world before cutting into less familiar terrain.
Russia Gives Reasons for Optimism
The outlook varies from country to country. Russia, in Moody's view, should stay in the lead, given the number of transactions delayed from last year and the possible injection of fresh blood from second-tier banks.
The agency put structured finance issuance from Russia last year at $1.8 billion, approaching the $2.0 billion estimate made by ASR (2/4/08). But the effervescence in early 2007 had stoked forecasts at least twice that "the market's original expectations of between $5 billion and $7 billion were not met," Moody's said. When primary demand went up in smoke later in the summer, Russian originators turned to warehousing facilities.
Still, the intermediate- to long-term view for Russia is sanguine. The stunning growth of mortgage lending hasn't crashed with tighter credit conditions worldwide, a sign that it will take grimmer circumstances to tamp down the main catalyst for continued securitization. At the end of 3Q07, the volume of outstanding loans swept past $22 billion, a jump of over 200% from the $6.9 billion posted 12 months earlier, according to Moody's. And the agency said that while banks have suggested that they might tighten lending criteria - a move that would typically curb origination - the appearance of new originators could keep overall volumes growing.
Covered Bonds to Go Turkish
Meanwhile, in Turkey, Moody's registered $2.35 billion in structured finance issuance, a hair above the $2.3 billion tracked by ASR (2/4/08). The dominance of diversified payment rights (DPRs) spilled over into 2007 as existing assets failed to make an impact, even with the Turkish parliament's enactment of a long-awaited mortgage law in March 2007. But the agency forecasts the emergence of existing assets in the second half of 2008.
"We believe that Turkish issuers will choose to issue first mortgage-covered bonds, followed later by RMBS, auto and/or SME securitization deals, but probably not before 2H 2008," the agency said, predicating this possibility on an easing of current market conditions.
Consumer loans in Turkey are also on the structured markets radar. While mortgage volumes hit YTL29.3 billion ($24 billion) at mid-November 2007, general consumer loans stood at YTL26.7 billion. According to the latest figure, growth in both classes has been consistent since mid-2006.
In Kazakhstan, where both Moody's and ASR posted $1.4 billion in 2007 issuance, the picture looks a bit more complicated. While there is an existing asset pipeline, and the warehousing of mortgages also points to issuance activity, ratings trouble could deter issuance. A breach of rating triggers on the originator might lead to servicing transfers or early amortization, the agency said.
New Deal in Poland
On the Central and Eastern European front, Moody's predicts more activity this year, based on securitization projects in the pipeline. The agency said the CEE region posted a single public deal in 2007, a PLN100 million ($40 million) Polish covered bond transaction. There was also a private one originated by Poland's Millennium Bank for PLN850 million.
"One of the main reasons for the delayed development of securitization in Central Europe is the fact that the banking sector in the region generally enjoys ample liquidity and therefore has smaller need for external funding sources," the agency said.
The region has already given off a spark of activity for 2008. Poland's Raiffeisen Leasing Polska closed a 280 million ($408 million) auto leasing deal earlier this month (see pg. 18). The deal refinanced one that came out two years ago. In a sign of the times, it was privately placed.
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