Russian Factoring 1 is in serious trouble.

The deal's originator and primary servicer, Eurokommerz, has technically defaulted on its plain vanilla debt. Meanwhile, crumbling credit enhancement coupled with shrinking collections prompted both Fitch Ratings and Standard & Poor's to cut the ratings on the factoring receivables-backed transaction in December.

In the same release in which S&P announced its move, the agency withdrew the devalued rating "at the request of the issuer." It cited "lack of visibility" from the servicer as a chief catalyst for the pre-breakup downgrade. The standby servicer is Bank VTB.

A Eurokommerz press official didn't return an email request for comment. An S&P analyst couldn't be reached before press time.

With RUR4.5 billion ($142 million) outstanding at last count, the A series of Russian Factoring is now at 'B' on Fitch's scale. S&P had cut it to 'BB' before pulling the grade. A mezzanine series, totaling about RUR300 million, is rated 'CCC' by Fitch and was 'B' by S&P prior to withdrawal.

Closed in December 2007, the transaction initially had 'BBB'/'BB' ratings from both agencies and a legal final maturity of Sept. 2009. The senior notes were RUR7.5 billion, and the mezzanine piece RUR500 million. The arranger on the deal was Deutsche Bank, which also shared lead manager status with Bank VTB Europe.

At least through December, Eurokommerz deputy chief executive officer has been Tim Nicolle, who moved over last year from Deutsche, where he was a managing director in the emerging markets division. It was unclear whether Nicolle had fallen victim to a management reshuffle as of press time, as a new owner had recently taken over, according to news reports.

In September of last year, the company partially redeemed Russian Factoring for a total RUR6.25 billion. According to S&P, the notes were reduced to RUR5 billion at that point, which would indicate that an additional amount was issued under the program between the close in December 2007 and September 2008.

On its Web site, the company had announced a refinancing in the form of a securitization to the tune of RUR5 billion, adding that Fitch and S&P had rated the senior notes of this additional funding 'BBB'.

At that point, amendments were added to Russian Factoring 1, terming out the revolving period of the factoring receivables to March 2009 from September 2008 initially and postponing the legal final maturity to March 2010.

It was last December, however, when things started to unravel. The company missed a combined RUR441 million in debt payments, which it attributed to a "scarcity of funds [that] resulted from accelerated repayment of loans together with low receivables collection."

But some market players apparently balked. One sharp display of skepticism came from analysts at Russia's MDM Bank.

"Eurokommerz claims it had to redeem early some of its loan facilities, while asset recoverability has significantly deteriorated," said research notes posted on the Web. "It is, of course, difficult to judge how honest these explanations were."

Apart from the early payments in September, Russian Factoring 1 has started early amortization. The deal's creditworthiness is anchored by a dynamic credit enhancement model.

"In each month you have a reset of the enhancement," said Michael Hoelter, a director at Fitch. "For the December payment date, the enhancement level was 68.5% for Class A and 55.8% for Class B to maintain the [initial] ratings." It turned out that enhancement was actually at 34% and 29.8%, respectively.

A steep rise in the MosPrime Rate, a key reference rate, has occasioned the required increase in the enhancement needed for each ratings level. A casualty of the severe liquidity crunch, one-month MosPrime ended the year at 20.2%, scaling into the double digits only in October.

In addition, the delinquency ratio consisting of all assets overdue by more than 30 days breached the early amortization trigger level of 7.5%, reaching 10.69% in December. Portfolio turnover has also drastically slowed down, with the days' sales outstanding for the receivables pool reaching 376 in November, having averaged 135 before that.

"This indicates that underlying debtors and customers in the portfolio are severely hit by refinancing constraints affecting the Russian SME segment," Fitch said in a report.

Among the deal's strengths at its outset was the fact that Eurokommerz is the leader in Russia's factoring market, with slightly over a fifth of receivables transferred. In addition, at least as of early last year, the company maintained a diverse client base, with no single customer accounting for more than 5% of its factoring portfolio.

In the thick of its recent distress, Eurokommerz's ownership apparently changed. Local news reports said that Kazakh zinc magnate Rifat Rizoyez took about 70% control of the company in December through a margin call on shares that had been pledged as collateral for loans provided by Rizoyez-controlled firms. The management of the company had assumed 70% of the company in November by exercising an option. The other 30% is held by Russia New Growth Fund, a direct investment fund managed by Troika Capital Partners, according to the Interfax news agency. Apart from Troika Dialog Investment Co., fund investors include multilateral European Bank for Reconstruction and Development (EBRD), Temasek Holdings, Goldman Sachs, LFT Group and AXA.

In late December, Troika Dialog Management Co. filed a suit against Eurokommerz in a Moscow court. The plaintiff is seeking RUR813 million stemming from the factoring company's debt default, the Prime-Tass news agency reported.

Moody's Investors Service downgraded Eurokommerz to 'Caa2' last month. The agency doesn't rate the company's structured deals.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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