More diversity may be on the way for Russia’s mortgage-monopolized securitization market, according to Standard & Poor’s and Moody’s Investors Service.
S&P sees unsecured consumer loans and credit cards as especially ripe for the asset-backed treatment, while Moody’s expects a range of non-mortgage assets to get securitized. The catalyst is legislative - namely, a securitization law that is scheduled to go into effect this July.
“We expect domestic securitizations of new asset classes as a result of the new law,” said Olga Gekht, a senior analyst at Moody’s. “The main sectors we would expect are securitization of auto loans, consumer loans and loans to SMEs [small and medium-sized enterprises.”
Ruble-denominated auto loans have only been securitized in cross-border, dollar-denominated deals, while ruble SME loans have apparently never been securitized. Gekht said that Russian banks have historically focused on auto loans and consumer loans because of their higher rates and shorter terms.
“Many banks have large auto loan and consumer loan portfolios, which they would be interested in securitizing to obtain funding and free up capital,” she said.
On the website of state-controlled giant Sberbank, interest rates on unsecured consumer loans of up to five years start at 17% while those on auto loans are 13.5% and up. Unsecured consumer loans and credit card receivables are good securitization candidates because of their growth, according to an S&P report. Origination in this combined sector soared between 2010 and 2012 [see above chart]. That growth is slowing but remains above 20%.
Using Central Bank of Russia data, S&P estimated that the outstanding amount of consumer loans and credit card debt totaled RUB9.7 trillion ($268 billion) as of Dec. 1, 2013.
“Banks still require funding to maintain the growth in retail loans,” S&P said. “The new law’s ability to bolster the domestic ABS market will largely depend on cost efficiency of securitization compared to unsecured bonds.”
The law will facilitate the securitization of a range of assets. To date, securitization legislation has only covered mortgages. The new law codifies the establishment of SPVs and comes with a bundle of amendments to existing laws that will help regulate asset pledges. Prior to this legislation, non-mortgage assets were securitized in either pure cross-border fashion — assets sold to an offshore SPV, which then issued notes off-shore — or a dual SPV structure, said Gekht.
The cross-border approach was the more common one before the crisis and worked well with dollar assets. But offshore deals out of Russia have been nonexistent since 2009.
The dual SPV structure was used most recently by Home Credit & Finance Bank in a November 2013 deal. The structure allowed investors to have recourse to the assets under Dutch law, which added security. But, without proper securitization legislation, the use of a Russian issuer injected some legal uncertainty into the transaction. S&P said the new legislation will allow for simpler securitization structures, providing incentive for issuers to do these deals as well as greater comfort for those buying them.