Russia's potential is becoming synonymous with existing assets. Traditionally in emerging markets, offshore future flows provide the opening theme of the cross-border securitization story - only after significant activity and a good deal of time do players segue to onshore existing assets. In Russia, the shift has happened much quicker.
"The trend will continue for existing assets over DPRs," said one London-based banker, voicing the industry's consensus view. DPRs refer to diversified payment rights, which have recently formed the most active sector in financial future flows. "Securitizing existing assets will give [originators] alternative funding plus regulatory capital relief," he added.
Originators have already tapped consumer loans, auto loans and leases linked to railway stock. The door to the sector swung open in July, when Bank Soyuz issued a deal backed by auto loans via Greenwich Financial Services and MNB Capital Markets. Since then, Home Credit & Finance Bank has securitized consumer loans through HVB; Russian Standard Bank has done the same via HVB, Barclays Capital and JPMorgan Securities; and a group of leasing companies has issued an ABS with Russian Railways as the obligor and Morgan Stanley, CIT Finance Investment Bank, and TransCredit Bank as joint leads. In addition to more of the same, mortgages, credit cards, and loans to small and medium enterprises are all under discussion.
In all these asset classes, volumes are growing by leaps and bounds thanks to an economy that is flying high on stratospheric energy prices. Personal loans denominated in local currency, for instance, totaled a touch over RUB1 trillion ($37 billion) at the end of January, leaping by more than three times from RUB246 billion at the end of 2003, according to a bulletin put out by the Central Bank of the Russian Federation. What's more, there was substantial growth during every single month of that 25-month time span. Personal loans denominated in foreign currency have grown less spectacularly, but still at a brisk pace, reaching RUB176 billion at the end of January from RUB53 billion at the close of 2003.
Leasing also has arrangers licking their lips. After the Russian Railways-linked deal, other leasing companies, both standalone and arms of major banks, were itching to collateralize their leading assets, according to a source familiar with the sector. The heady pace of equipment upgrades in the torrid economy is fueling origination in the sector, translating into an ever-expanding pool of securitizable leases.
On the mortgage front, things are trickier. There has been talk that Vneshtorgbank would soon come with an RMBS, but the details are sketchy. The potential, players say, is certainly there, with one source saying the major mortgage banks are doubling their mortgage portfolio every year. Chris Such, a director at Standard & Poor's, said that growth is coming on the back of Russians seeking to trade up to larger properties and extended families that are splitting up into separate dwellings. The legal issues remain somewhat sticky however. Critics argue than an MBS law adopted in November 2003 still lacks the regulations that would allow for its successful implementation. Arrangers could bypass this and establish an SPV abroad, as they have with other existing asset deals, but the process is more onerous than with other existing assets, sources said.
Once an asset pool is deemed securitizable in Russia, the question that arrangers are asking is "how can you repackage existing asset flows into securities that are palatable to investors?" In terms of denomination, players have come up with different answers, depending on which investors they are targeting. While Russian future flow deals have been denominated in dollars, existing asset transactions have been in euros, dollars and, most interestingly, rubles.
Sources said that all three are possibilities going forward, with the local currency option on the table, as long as hedge funds and similarly risk-prone investors are willing to take the currency risk straight on. One advantage to a straight ruble risk is that there is no need for a currency hedge, which is tough to secure for a Russian deal that is longer term. "It's expensive to swap into euros and dollars," said one London-based banker. A way to do it is through a rolling hedge, a product used in Russian Standard Bank's recent 300 million deal, which has a scheduled maturity of three years.
Financial future flows in Russia, namely DPRs, are arousing less interest than existing assets. Gazprom, Rosbank, and most recently, Alfa Bank, have all tapped their future flows, but sources said the potential for more is thin. The main reason: leading potential candidates have been able to obtain unsecured funding at attractive rates, sources said.
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