New Blood Revives Russian RMBS

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Mortgage backed securities in Russian rubles hit a new high in issuance last year, reaching about RUR50 billion ($1.6 billion) from somewhat over RUR30 billion in 2011, sustained largely by purchases from the government’s Agency for Housing Mortgage Lending, AHML.

Players say that fairly robust loan origination, paired with AHML’s commitment to the sector, are strong enough to keep issuance on par with 2012.

At any rate, the most remarkable event in Russian RMBS last year was not so much overall growth as the debut of five new originators. Players say the issuer stable will keep growing.

Olga Gekht, a senior analyst at Moody’s Investors Service, forecasts a mix of new and repeat issuers this year. “This has been a useful funding tool for originators,” she added. “And the AHML [RMBS-purchase] program will definitely run through this year.”

Even with the boost from AHML, RMBS in the country would not have consistently grown over the last two years without a strong and steady supply of raw material.

And the supply of mortgages, in fact, soared last year, according to data compiled by the AHML.
During the first three quarters, the sector originated 475,800 mortgages worth a total RUR699 billion, up from around 339,900 mortgages amounting to RUR466 billion during the same period in 2011. These are record highs.

Banks held RUR1.68 trillion in mortgages on their balance sheets on Oct. 1 2012, up 42% or RUR496 billion over the previous year.

“Mortgage portfolios are growing quite rapidly – that’s a general trend,” said Vladimir Dragunov, a partner at Baker & McKenzie.

Mortgage growth in Russia has been yolked to interest rates hovering near historic lows and overall economic health. These two drivers, however, are precarious. Although Russia has bucked the doldrums that have afflicted much of Europe, headwinds from the west are still being felt. The general view is that this commodity-based economy would have grown more than 3.5% last year if not for the drag from the EU.

Interest rates on mortgages, meanwhile, are trending upward.  From bearing about 12.1%, loans, which tend to have maturities of 15 to 20 years in Russia, yielded an average 12.3% at the start of the final quarter. AHML sees rates rising this year, but still remaining below 13%. Monetary policy in the country has remained tight as the Bank of Russia endeavors to rein in inflation, which ran at an annual 7.1% in January.

All the same, AHML predicts still-brisk growth in origination this year of 650,000 to 680,000 loans, worth between RUR1 trillion and RUR1.2 trillion.

This will provide enough fuel to keep RMBS issuance humming.

Last year, the market saw seven issuances, with five transactions coming from first-time issuers . The debutantes included NOMOS-Bank, Investment Trade Bank, Asian-Pacific Bank, Credit Europe Bank, and Bank Uralsib.

This is reflective of another trend in the market. While AHML has been an active purchaser of RMBS, it has been refinancing a shrinking share of mortgages directly from originators.

Dragunov said the debuts are interesting because they show you that AHML program is available to a range of issuers. But these banks are not new to the capital markets in general, as some have issued within the domestic unsecured bond market while others have even done Eurobonds. One of the advantages of RMBS for these banks is the capital relief offered by the Bank of Russia, Dragunov said.

The only non-Moscow based bank among the newcomers was the Asian-Pacific Bank, located in the far eastern city of Blagoveshchensk, on the border with China. But even so the mortgages backing deals showed more geographic diversity than historic RMBS from smaller originators, according to Gekht.

The deals’ senior tranches went primarily to the AHML, while the subordinated tranches were retained.

AHML’s RMBS-purchasing programs tend to cover five to six deals each. Among the criteria is that the transaction must be investment-grade and fulfill other criteria spelled out in mortgage legislation, such as LTVs below 80.

Another state run program to support construction loans is run by Vnesheconombank (VEB), a development bank that handles state pensions. A few transactions have been placed under this program. VEB is also a very active investor in domestic RMBS and covered bonds, according to Dragunov.

The government opened the door for VEB to invest its pension assets as well as its own funds in MBS when the law on state pension fund investments was amended in 2009. That same year, the bank launched a RUR150 billion program to mortgage and construction industries during the crisis, according to a recent report by Standard & Poor’s. “While that initiative was expected to terminate by the end of 2013, approximately 90% of the program amount was still unused as of November 2012, leaving a large capacity for 2013,” the agency said.

AHML itself and established mortgage lender VTB24 issued the only deals last year from originators not making a debut in the RMBS market.

Baker & McKenzie’s Dragunov said that although the AHML and VEB will remain the main funders of RMBS this year, there is likely to be more market-driven issuance.

But if any cross-border private sector investors want a piece of Russian RMBS — and with a coupon of 8.75% it is easy to see why they might — they will need to be comfortable with straight ruble exposure or pay for the hedge themselves.

Dollar-denominated RMBS from Russia may never come back after falling out of favor during the financial crisis. Collateral itself that is in dollars is also disappearing fast. In the first quarter of 2007, the ruble-dollar currency ratio of origination in Russia was 75 to 25. With the near collapse of lending in 2009, the share of ruble loans jumped to 90% and has grown since then. At the end of 2012, the ruble-dollar ratio in origination was 99 to 1.

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