NEW YORK - At the Securitization in Emerging Markets conference held by the New York Society of Security Analysts, speakers were all over the map, but a single country cropped up repeatedly in the string of talks: Russia. Some attendants sounded a cautionary note on the country; while others, notably boutique shop Greenwich Financial Services, were more optimistic. Either way, the feeling was that Russia couldn't be ignored.
For credit analyst Igor Axenov at Genworth Financial Asset Management, risks related to securitization are still pervasive in the country. In the banking sector, for instance, service is lacking, he said. "Depending on how you're introduced, you're treated differently," Axenov added, saying that foreign banks that have set up shop in Russia haven't necessarily done a better job. "There is a low quality of all banking services for non VIP customers."
Another problem Axenov cited were "captive" credit bureaus at the major banks, which inhibited information exchange and therefore the construction of individual credit histories. What's more, new legislation establishing credit bureaus, has not advanced as well as he had hoped.
Greenwich Financial Senior Vice President Dmitri Dorofeev was more sanguine about the new law. "It came into effect September first and credit bureaus are already opening up," he said, adding that initially, the smaller banks will join the bureaus because they have been locked out of information hoarded by the larger banks. Eventually, however, the larger banks should join as well, as the advantages of pooling information become apparent, Dorofeev said.
On the legal front, the absence of an overarching ABS legislation poses its own set of problems, according to attendants. "Russia does not have a securitization statute," said Dennis Vinokurov, associate general counsel of the Open Society Institute, affiliated with the Soros Foundation Network. "[But] even without an ideal regulatory framework the advantages of securitization have prompted the introduction of several structured finance arrangements."
One such transaction is the country's debut Russian auto-loan ABS, led by Greenwich. Dorofeev was confident that the true sale will hold in that deal. "The qualifications refer to enforceability," he said, adding that English law, which governed the sale to a Dutch SPV, would be enforceable in Russian courts, according to the legal opinion obtained from issuer counsel Clifford Chance. "Even if they didn't stand and the courts applied Russian law, it can be done as a true sale itself." (For more details on auto loan ABS and Greenwich's view of Russia's new MBS law, see interview, p. 23).
More broadly, Vinukurov from the Open Society Institute noted that some observers say corruption in Russia has been on the rise under President Vladimir Putin. These include an authority, global watchdog Transparency International, which puts out a corruption perception index every year. The 2005 list, released Oct. 18, had Russia ranked 126, snugly fitting in the same category as Niger and Sierra Leone.
Other issues pertinent to securitizations from Russia, and other emerging markets, were addressed by Robert Michael, the chair of the foreign and comparative law committee of the New York City Bar Association. He noted that in crafting a structured deal for a given issuer, an arranger must keep in mind whether sovereign instrumentality - referring to companies that have some component of state ownership - is in play at all. "In our courts, [those companies] have sovereign immunity, unless it's waived," he said, adding that in the past he had encountered foreign issuers that were unaware of their own sovereign instrumentality status.
Another issue Michael raised was title retention when an originator has sold an asset but has not yet been paid in full. Title retention is not a problem in the U.S. or Latin America but poses challenges in Europe. Where it exists, the originator still owns the assets, no matter how much of the transfer has been paid.
Addressing prospects in Latin America, Moody's Investors Service Senior Vice President Maria Muller predicted that growth of structured issues would continue apace in Brazil's domestic market, with issuance volume up 55% through August, versus the full year 2004. So far in 2005, future flow and personal loans have been the dominant asset types, comprising 24% and 22% of issuance, respectively.
Slowly winning back the hearts and minds of ABS players, Argentina has churned out 75 domestic transactions through August, a considerable leap from the 34 deals registered in the same timeframe in 2005. But Muller noted that deals remain small, averaging close to $10 million and maturities remain short, with legal finals seldom extending beyond two years. "Market participants want to proceed with caution," Muller said, referring to the lingering effects of the widespread defaults that hit the country following the currency devaluation of January 2002.
Also figuring in Muller's talk was Mexico, arguably the emerging market where domestic issuance has most whet the appetite of foreign arrangers and investors. Excluding mega-securitizations by IPAB, a federal bank that overseas banking insolvencies, issuance in Mexico's domestic market hit $1.4 billion from January through August, the same volume posted in all of last year.
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