Last year was an exciting time for the region encompassing Eastern Europe, the ex-Soviet Union, the Middle East and Africa, known as EEMEA. Turkey pumped out transactions like a well-oiled future flows factory, Egypt produced a massive $1.5 billion export-backed deal, and Kazakhstan yielded its first-ever capital markets securitization.
Russia, in contrast, had a quiet 2005, with one loud exception, an auto loan-backed transaction that reverberated far more than its modest circumstances would suggest. As the first existing asset securitization out of the country and a harbinger of more to come, Russian Auto Loans Finance won the EEMEA Deal of the Year for 2005. The award covers all of EEMEA, except for South Africa, a bustling market that nonetheless falls outside ASR's purview.
One of the most curious features of Russian Auto Loans is that neither the originator, Bank Soyuz, nor the co-leads, Greenwich Financial Services and Moscow Narodny Bank, had experience in the area of emerging market securitization. "We were transacting securities in some of the CIS countries and were asked if we knew how to do this," said Bill Frey, president of Greenwich, based in the leafy Connecticut town of the same name. Within a year, the shop and its newfound partner had closed the $49.7 million deal.
Russian Auto Loans Finance is comprised of four tranches. Sized at $43.7 million, A1 is the main chunk sold to investors, with an average life of one year and a legal final of five. Moody's Investors Service, the only agency to rate the deal, gave that piece a Baa3.' It priced at 175 basis points over one month Libor. An A2 series for only $100,000 concentrated all of the prepayment risk and was an inverse floater, pricing reverse to Libor with a coupon that was roughly 1,500%. Subordination came from a mezzanine B tranche for almost $4.0 million and a subordinated C tranche for almost $2.0 million. The transaction closed July 25.
The deal's 10 investors included Asian, European and offshore U.S. accounts. Solely registered as a Reg S deal, the transaction was off limits to onshore U.S. investors.
Perhaps the toughest obstacles facing the deal were the legal ones. Russia had introduced a law enabling mortgage backed securities in December 2004, but that legislation was far from perfect, sources said, and, at any rate, could not be applied to auto loans. In addition, true sale had not been tested in local courts, a prospect that had scared and continues to turn off other potential players. The participants decided to have English law govern the true sale, but legal counsel Clifford Chance also believed that, as structured, the transfer would hold up in local courts.
The spread of the A1 tranche was comparatively wide for the ratings category and short, one-year average life, but Frey said the all-in cost was lower than other financing alternatives for Soyuz. The originator would be sub-investment grade were it publicly rated, according to Frey. What is more, "future transactions should be priced tighter; this is normal as the market develops," he added.
Greenwich tackled auto loans first rather than mortgages - where the true promise of Russian existing assets lies - because the former asset is shorter. "We knew that a shorter deal backed by auto loans would an ideal first for the Russian Federation," Frey said. Greenwich, however, has already branched out into mortgages and expects to arrange its, and potentially the country's, first capital markets RMBS in the second quarter.
"Russian auto loans paved the way for other onshore asset transactions," said Yaron Ernst, head of business development for structured finance at Moody's. "The deal has been closely watched by both the local and international financial communities." In the wake of the Soyuz deal, there have already been other existing asset deals out of Russia, namely a pair of consumer loan-backed deals arranged by HypoVereinsbank for Russian Standard Bank and Home Credit & Finance Bank. "I also expect to see activity expanding soon to other asset classes, such as MBS and CDOs," Ernst said.
The collateral in the Soyuz transaction consists of 3,679 loans for new foreign cars. The average LTV was about 70%. A relatively young program, all the loans were originated in 2004. Partly making up for the lack of loan history was the quality of borrowers, said deal participants. There have been no enforcement procedures for non-payment and only one repossession.
On the servicing front, borrowers cannot make payments by debit and must instead go to one of seven Soyuz branches in Central Moscow. While this unsophisticated form of decentralized servicing could make investors apprehensive in other countries, deal participants said it was par for the course in Russia. In addition, the originator has a backup servicing agreement with Russian Standard.
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