An unusual deal from Russia came to light last week. The first public trade receivables ABS to be rated by Standard & Poor's, this transaction collateralizes factoring invoices that are denominated in rubles. It formally closed in December, but the parties involved apparently decided to go public with it a month later.

According to web site www.cbonds.info, which tracks Russia's fixed-income market, placement of the deal ended in January. The arranger, Deutsche Bank, could not be reached for comment. Bank VTB Europe was a co-lead. Eurokommerz, the originator, has a 22% share of the factoring market in Russia by receivable volume, the largest portfolio in the industry.

The transaction consisted of RUR7.5 billion ($306 million) in senior notes and RUR500 million in a subordinated loan facility, both with a legal final of Sept. 21, 2009. S&P rated the top series BBB', and the loan BB.' In its report, the rating agency noted that it wasn't "very common" for it to rate a trade receivables deal, given the subordination requirements for commingling and fraud.

Under the deal's structure, an independent company, Eurokommerz Cash Manager, collects the invoice payments. This keeps the cash flows of the issuing vehicle and originator separate.

The transaction also features dynamic subordination. If the portfolio losses rise, the subordination follows suit. If the losses in the daily ledger breach 3%, the subordinated loan can be tweaked upward. Another possible event is a DDP' event, with DPP being the amount that is paid by the factor to the customer once the invoice has been fully repaid by the debtor to the issuing vehicle of the deal. If nonpayment by the debtor results in losses of over 3% or meets other conditions, the issuer will pay down the senior and mezzanine facility by an amount equal to one-sixth of the outstanding amount of the senior and mezzanine facility.

In the case of factoring with recourse - in which the factor retains a claim against the customer if the debtor becomes insolvent - a delay by the debtor in making the payment will reduce the DPP, which the factoring company makes to the customer, said Prashant Dwivedi, associate director at S&P. So the customer has an incentive to make a payment on the debtor's behalf.

"What you see happening is the customer making the payment on behalf of the debtor itself, because ultimately they are liable, in case of factoring with recourse, which constitutes the majority of the portfolio," he said.

The average payment term for the factoring invoices originated by Eurokommerz is 105 days at closing, but it can stretch from zero to 150 days. The collateral has a concentration limit of 0.5% for each customer or debtor.

At press-time it was unclear whether the transaction went to Russian or cross-border investors, or a combination of both. A ruble-denominated CLO of SME loans that closed in December ended up exclusively with Russian investors, after sole lead Unicredit Aton International decided not to wait for Western European investors to scale back their spread expectations in the uncertain climate. With an expected maturity of six months, the CLO's senior tranche totaled RUR2.3 billion and priced at an annualized 10%.

In 2007, Eurokommerz had approximately 4,000 customers with a volume of factoring receivables exceeding $1 billion, according to S&P. Dwivedi said other factoring companies from Russia may go Eurokommerz' funding route.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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