Talk of a securitization coming out of Russia is nothing new but recent evidence suggests that some major companies are again looking at the technique as a way of raising finance. This may raise eyebrows among hardened ABS aficionados, but rumors abound that Russian firms with major export revenues are back in discussions with ratings agencies and banks to see if, this time, a transaction can be launched out of the country.
In 1998, some of the major oil and gas exporters made attempts to launch deals that made use of securitization techniques, but one by one these fell by the wayside. Two of the biggest oil companies, Yuksi and Lukoil, mandated Chase Securities to arrange transactions for them (ASRI, 4/6/98 p.1), and gas giant Gazprom also made an attempt at a deal.
However, legal obstacles and poor economic conditions - including the government's default on its obligations - caused frustration among all parties and led to any possible deals being scrapped.
Two years on and it is still the petroleum sector and other commodity producers that are being talked about as potential issuers. The factors that these firms have in common is that they are all export-orientated and they are all currently involved in high-cost capital programs that will enable them to significantly boost revenues. They are also linked by being surrounded by rumors and gossip, most of which is impossible to reliably substantiate.
State power company, UES, for instance, has been linked with a $100 million future flow deal, while Gazprom is thought to be talking to bankers about a deal on similar lines. Even the Russian finance ministry has been linked with a $900 million issue, designed to securitize its debt with the intent of squeezing inflationary pressures in the economy, although that has yet to be confirmed by government officials.
"We have seen some interest in the market regarding potential securitizations in Russia, mainly in the commodity sector," said Benedicte Pfister, analyst with Moody's Investors Service's structured finance group in London. "However, we have not closed any transactions yet."
She acknowledged that there were many problems that would make life difficult, though, highlighting regulatory and tax issues facing Russian transactions. "One difficulty lies with the existing Russian currency regulation, which requires that 100% of export proceeds be repatriated to Russia and up to 75% of it converted into roubles," she said. "If the funds go back to Russia, it becomes difficult to pierce the sovereign ceiling without some form of external support."
But there were ways round this problem that would allow the sovereign ceiling to be pierced, she added. "It may be possible to mitigate this risk via a special license from the central bank exempting a party from this repatriation rule," she continued. "Having a highly rated third party covering this risk would also be very helpful."
Understandably, other pros are still not optimistic that deals will come to market in the near future. "To date, nothing has really happened. It's never been tested, the legal issues are not clear and the talk about the big oil and gas companies using securitization has been around since 1995," said Alexander Batchvarov, head of ABS research at Merrill Lynch. "In legal terms, there is no one specific problem, but because it is a single jurisdiction, that usually requires a specific securitization law. I'm unaware of such a law being passed in Russia."
Batchvarov also pointed to data problems, and a lack of suitable asset classes, particularly in the traditional ABS markets, from which transactions could be launched. "Any deal will have to go through so many hurdles. Whatever assets are being securitized, you need historical data: Russia doesn't have much data," he argued. "In the last six years or so, the economy has gone through many dramatic ups and downs, so how relevant and how accurate the data is, is anyone's guess."
"In the more traditional sectors, this is a country where lending has been very limited in the past," he continued. "Because of that, where would you find the assets to securitize from?"