Fitch Ratings' recent moves on a handful of Russian ABS and MBS - most of which were decidedly negative - have raised the spotlight on Transfer & Convertibility (T&C) risk in the country.
The agency downgraded the Russian Federation to 'BBB' from 'BBB+' and likewise cut the country ceiling to 'BBB+' from 'A-.' The country ceiling expresses the likelihood that T&C restrictions will be imposed by the local authorities - since the Asian crisis of the late 90s and the Argentine default several years later, emerging market investors keep a close eye on this component of a deal's risk.
T&C controls can take many forms, but in a financial crisis they are often designed to tamp down outflows of capital from an emerging economy. In this round of ratings actions, how exposed a given Russian deal is to T&C risk largely shaped its downgrade vulnerability following the sovereign downgrade.
Red & Black Prime Russia MBS No. 1, which collateralized mortgages originated by DeltaCredit Bank, bore the brunt of the sovereign downgrade. The agency downgraded the class A notes on the deal to 'A-' outlook negative from 'A' outlook negative. One of the main triggers was "insufficient coverage for the risk of transfer & convertibility," said Jaime Sanz, senior director at Fitch, in a conference call last week.
Red & Black is enhanced by a liquidity facility provided by DeltaCredit parent Societe Generale, but that coverage was not enough to prevent a demotion. A lower country ceiling widened its distance from the class A notes by one notch, which was corrected by the notes' downgrade. The facility covers six months of class A interest and senior fees, and provides liquidity in the event that the Russian government imposes T&C restrictions.
At the same time, the agency slapped the 'A-' rated senior notes of Russian MBS 2006-1 with an outlook negative. The transaction, originated by Bank VTB, was able to escape a flat-out downgrade in part because of a liquidity facility guaranteed by the International Finance Corp. (IFC), rated 'AAA.' Providing up to 18 months protection from T&C restrictions, the facility would also shield the senior notes from a further single-notch drop in the country ceiling.
The bleaker outlook for Russian MBS, however, reflects the chance that the sovereign's rating would sink more than one notch.
A third MBS from Russia, Moscow Stars, shrugged off the corporate downgrade. Fitch was able to affirm the 'BBB' outlook negative on the senior notes in part because they remain below the country ceiling. However, the agency pointed out that the rating would be vulnerable to further downward revisions in the country ceiling. Kazkommertsbank unit Moskommertsbank is the originator.
Apart from the T&C ingredient, Fitch reassessed each deal at its particular rating level in the context of the Russian government's lower rating. This entailed revised stress levels, which were more stringent for such indicators as foreclosure frequency, recovery rates, and average market decline assumption.
In the conference call, Fitch Director Michael Hoelter pointed out that none of the negative rating actions were the result of deteriorating performance, although he added that a number of stresses are likely to eventually impair performance.
One precursor to a potential upswing in delinquencies is the slowdown in prepayment speeds the agency has already observed in some quarters. Hoelter said that typically in Russia, a struggling mortgage debtor will strike a deal with the lender and sell the property prior to any default enforcement. Apart from the fact that this practice doesn't show up in portfolios' default rates, it also leads to relatively high prepayment figures. "The prepayment speeds, especially in Moscow Stars, have started to decelerate, which Fitch interprets as either debtors no longer being able to pursue amicable solutions or [that they're] facing liquidity constraints," Hoelter said.
Existing asset transactions from Russia weren't the only ones to falter in the wake of the sovereign downgrade. Fitch also downgraded Russia International Card Finance to 'BBB+' from 'A-' after the originator, Rosbank, was dunked in the wake of the sovereign downgrade. Again, as in the MBS transactions, eroding performance was not the impetus for the one-notch drop. A securitization of present and future credit card receivables, the deal boasted a three-month rolling debt service coverage ratio of 6.53x as of January 2009, well above the 3x trigger level. Nevertheless, collections have been waning over the last few months.
Finally, Fitch changed the outlook on Gazprom International's 'BBB+' to negative from stable. The deal collateralizes export receivables from OAO Gazprom from long-term gas delivery contracts with two European importers. The move mirrors the same change in Gazprom's corporate rating, which in turn stems from the downgrade in the Russian sovereign.
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