Structured finance investors with a taste for ruble exposure might soon have something to nibble on. In the works is a six-year final, RUR13.8 billion ($498 million) deal backed by leases linked to rolling railway stock. Morgan Stanley, CIT Finance Investment Bank, and TransCreditBank are joint leads, according to a presale report by Moody's Investors Service, which has given the deal's RUR12.6 billion A piece a provisional rating of Baa2.'
Like other transactions from Russia, the structure is not a pure true-sale. The assets, which are currently owned by a handful of leasing companies, and leased by Russian Railways, will be sold to the Russian branch of a Luxembourg-incorporated SPV, Red Arrow. This onshore portion of the deal's architecture is governed by true sale - albeit under untested Russian law - but the other nuts and bolts have a pledge feature. The purchase of the receivables is financed by a loan from Red Arrow International Leasing, an Ireland-based SPV. The structured notes, in turn, fund the loan. Red Arrow secures this debt obligation to the Red Arrow International Leasing by pledging, under Russian law, the leases and rolling stock to the issuing SPV.
"There is both a true sale and a pledge," said Nicholas de Swardt, senior associate at Moody's. While the agency rates the deal's obligor, Russian Railways, A3' on the local currency global scale, the deal is two rungs lower. "The differential between the rating of the obligor and the class A notes is mainly driven by residual uncertainties over legal issues and future VAT levels," de Swardt added.
Apart from the doubts that hover over Russian law and securitization, for this specific transaction, value-added-tax (VAT) charged on the lease payments forms part of the principal payments on the structured paper. While Moody's feels that the excess spread and the mechanism for computing the lease payments shields the Class A notes from changes in the VAT rate, there remains a degree of uncertainty as to how much VAT could weigh on the transaction.
CIT and TransCredit are the primary servicers for the deal and also act as back-up servicers for each other. Baker & McKenzie and Linklaters provided legal counsel to the leasing companies and arrangers, respectively.
The ruble denomination distinguishes Red Arrow's notes from other existing asset deals issued out of Russia since mid last year. An auto loan deal in July originated by Bank Soyuz was in dollars, matching the denomination of the underlying collateral, while a couple of consumer loan deals have been denominated in euros, with the underlying collateral in rubles. The latter structure is the case with a deal originated by Russian Standard Bank for t300 million (see ASR 03/13/06), which has HVB as sole arranger and Barclays Capital and JPMorgan Securities as joint leads.
The road show for that transaction, with stops in continental Europe and the U.K., was timed to wrap up last Friday, according to a source close to the deal. The pricing date hadn't been set as off press time.
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