Russia's ABS sector is getting a jolt from an unlikely corner of the world: Greenwich, Connecticut. That's the base of boutique shop Greenwich Financial Services, which has teamed up with the brokerage arm of Moscow Narodny Bank, MNB Capital Markets, to jointly lead an auto-loan backed bond for Bank Soyuz.
"This is the first true-sale securitization in Russia," said William Frey, president of Greenwich. "It works in a similar manner as closed pool auto deals and MBS work in the United States."
Greenwich's push into Russian ABS came as a surprise to arrangers pitching securitization deals in Russia, said a London-based banker. More than a few players expected that a global name more established in EEMEA securitizations would make the first stab at Russian onshore assets.
The deal is split into five tranches. A-1 and A-2 tranches, rated Baa3' by Moody's Investors Service, will account for 88% of the deal's value, or roughly $55 million at the current value of the pool. A B tranche, rated B2', will equal about $5 million and a C equity tranche will total approximately $2.5 million. There is also an unrated A-3 tranche, that is not part of the 88% volume totaled by the other senior pieces. "The A-3 bond is a function of the economics of the other classes in the deal as well as unique tax and regulatory considerations," Frey said.
Slated to price by the end of the month, the transaction, registered as a Reg S, will embark on a roadshow in Europe next week. The arrangers are targeting European and Asian institutional investors such as insurance companies, asset managers and banks, according to Frey.
The allocation of the first two A tranches will depend on demand for each, Frey said. The main difference is that A-1 has a 8.75% interest rate cap, while A-2 has none. While there is no currency mismatch in the deal - the underlying collateral is in dollars - the auto loans do charge a fixed rate, which differs from the floating rate of the securitized paper. The loans have a weighted average yield of 9.9%.
The novelty of onshore assets in Russia and lack of domestic law covering the securitization of consumer loans trains a spotlight on the legal protections set up in this structure. "Due to some legal uncertainties with regards to the Russian legal environment in general and the untested nature of securitizations in particular, the transfer of the assets as well as most of the documentation is under UK law," said Yaron Ernst, vice president and senior credit officer at Moody's. "The legal opinion confirmed that Russian courts are expected to recognize the choice of English law in this respect. However, if this were not to be the case, the legal adviser is of the opinion that the transfer would still be effective under Russian law".
Added Greenwich's Frey: "We have a legal opinion that doesn't expect a clawback if the issuer were to become insolvent." The legal offices of Clifford Chance in both London and Moscow provided counsel for the structure.
In its presale report, Moody's also noted that a mortgage-backed securities law passed in November 2003 marks an important step towards establishing a more a generalized securitization framework in Russia. The MBS law doesn't govern this transaction, however, as it is backed by auto loans.
The SPV is constituted in the Netherlands for the tax and structural advantages that confers on the originator, according to Frey.
Servicing for the deal is decentralized. "In order to make payments, the borrowers have to visit one of Bank Soyuz's branches: there is no direct debit or other possible way of payment," Moody's said in a report.
Decentralized servicing has proved troublesome in the U.S. market. For instance, highly rated consumer loan-backed deals from U.S. furniture retailer Heilig-Meyers defaulted when the store filed bankruptcy in August 2000 and borrowers could not make payments at the closed-down stores. Difficulties in making payments, however, are not a concern in the Soyuz transaction, according to Moody's Ernst and Greenwich's Frey. One reason is that that all the borrowers are from Moscow and the bank also has branches in St. Petersburg, Miass, Irkutsk, and other cities. Frey also noted that Soyuz has affiliate relationships with other financial institutions and that back-up servicer Russian Standard Bank has an extensive branch network. In its pre-sale, Moody's noted Russian Standard's "advanced IT platform" and "its own debt recovery agency" as major strengths. Heilig, of course, had no back-up servicer. Moody's rates Russian Standard Bank Ba3'.
In structuring the deal, Frey said that subordination was the most economically efficient enhancement for this particular transaction.
Among the transaction's strengths is the fact that the underlying loans are both prime collateral and a static pool, as well as the backup servicing agreement with Standard Bank, according to Moody's. Credit weaknesses include the lack of historical data on the portfolio, given that most of the loans were originated in 2004.
The portfolio consists of 4,153 loans secured by new upscale foreign vehicles. All the loans have been extended in the Moscow area over 2004 and early 2005. The weighted average LTV is about 70%.
Bank Soyuz was formed in 1992 as Bank Alina-Moscow and took on its current name in 2003 when it merged with Avtogazbank, Sibirsky Regional Bank and Narodny Bank for Savings. Soyuz posted assets of the local currency equivalent of $1.4 billion.
More existing assets are up ahead, according to Benedicte Pfister, managing director at Moody's. She said there was strong market interest for new transactions "both on the auto/consumer loan and residential mortgage sides."
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