NEW YORK - At the Russian Structured Finance Investment Forum held here last week, speakers pointed up the legal uncertainties that hang over structured deals from one of the securitization world's most promising corners. With the true sale concept untested in the country and major asset classes, such as mortgages, still in diapers, cozy legal clarity is not coming anytime soon, attendants said.
"Russia has been enacting laws at a fairly frantic pace, [and] they're doing it without a history of common law, lien concepts or anything remotely like that," said Robert Michael, chairman of the Committee on Foreign and Comparative Law of the New York City Bar Association, referring to the heady push to craft a legislative framework for securitization. The establishment of a law governing mortgage-backed securitization - amended twice - and efforts to craft laws to securitize other assets are like "building houses without foundations," he added.
Bankers, lawyers, and other participants in Russia's growing structured finance marketplace, seizing on the opportunities fed by burgeoning assets classes and by global investors on the make for higher yields, have found ways around these obstacles. This has principally meant using foreign laws to govern different components of structured deals in the hope that a Russian court will recognize them. "There's the assumption that it would," said Viktoria Balaknova, assistant vice president at Moody's Investors Service. "[But] we do appreciate the fact that it hasn't been tested; there is legal risk, however it's quantified enough for them to reach the ratings that they do."
The two most recent structured transactions from Russia, RMBS from originators CityMortgage and Vneshtorgbank, secured ratings from Moody's of Baa2' and A1', respectively.
Russian Standard Bank and MDM Financial Group are understood to have a auto loan deal in the works, while there's talk that aluminum producer Rusal is preparing its first future flow deal.
To be sure, legal uncertainty and immaturity doesn't always translate into downside, as a few participants reminded attendants. Simon Vine, managing director at Alfa Bank, said that, following the Russian financial crisis of 1998, many investors that purchased debt at bottom-of-the-barrel prices came away with fat profits. "I was managing distressed debt then, and everyone I know who took positions made money," he said. "Those huge discounts weren't justified, and they didn't have [explicit] legal protections; it turned out there was more order in the legal system of the country than lawyers predicted."
Yuri Tuktarov, project senior lawyer for the International Finance Corp., said that Russia's system offers some advantages to securitization. For instance, prepayment risk is diminished by difficulties in taking out new loans to refinance old ones.
Regardless of if and when participants anchor deals with local laws, for the mortgage market at least, there is one factor in particular that works strongly in favor of the proliferation and health of RMBS: market appreciation. At least in the Moscow urban area, political barriers to supply and a virtual monopoly of local developers have been propelling prices upward, according to Igor Axenov, a trader of the structured credit markets group at the Royal Bank of Scotland. These catalysts are in no danger of disappearing anytime soon, he added. "There are powerful interests behind the status quo," Axenov said. "The quality of [Russian] RMBS is good because the collateral is golden."
The arena of future flows, namely export receivables, foreign credit card vouchers and diversified payment rights originated by banks, hasn't inspired as much enthusiasm as mortgages and other existing assets, although there are three future flow deals outstanding. It might be a simple matter of volume, participants said. "The universe of banks that can do [DPRs] is much smaller than those that can do mortgages," said Vine. And as for foreign credit card vouchers, Rosbank, which has tapped them for an ABS, has around 90% of the Russian market.
Alfa bank itself has monetized its diversified payment rights, and is now looking at consumer loans, auto loan and mortgage portfolios to securitize in the future, according to Vine.
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