A Russian law that takes effect at the beginning of July will make it easier for local sponsors to structure domestic, onshore securitization trusts that are bankruptcy remote.
The legislation was designed in part to facilitate the securitization of loans to smaller companies, in order the boost the contribution of this sector to Russia's economy.
Although the law makes it possible to collateralize different types of assets, loans to SME are of most importance, according to a paper published by the European Investment Bank in November 2013. Despite recent growth, there sector is still considerable potential for this sector.
The number of SMEs per 1000 people is 2.5 times lower on average than in Europe, the EIB reported in March 2013 publication. Employment in the SME segment is 1.7 times lower on average than in Europe. Right now the most popular source of SME financing, according to the EIB analysis, is bank loans (27%), followed by borrowing from relatives and friends (19%) and trade credit (17%).
The other benefit the law provides is that sponsors of securitizations to comply with government requirements for supporting financing facilities. “In a very broad sense, introduction of the law is in line with the government’s efforts for de-offshorisation and its support of issuance under Russian law via onshore vehicles rather than offshore securitisation governed by foreign laws” said Igor Zelezetskii a vice president and structured finance analyst at Moody’s Investors Service.
However, “the new legislation provides a structural platform suitable not only for SME securitization but for a broad range of other asset classes as well,” said Zelezetskii.
The other benefit the law is issuers using onshore vehicles allows sponsors to comply with the government’s eligibility criteria for federal refinancing facilities and support programs.
To date, only Russian mortgage backed securities have been structured as onshore vehicles via a Russian mortgage backed securities law that was passed in 2003. The law has helped Russia’s MBS market to evolve rapidly. In the early stage, the main issuers of bonds were the state-owned Agency for Housing Mortgage Lending and VTB Bank, now among them there are also private and even foreign-owned banks in Russia such as Unicredit, Raiffesen and Societe Generale.
All other “domestic” transactions have employed a dual SPV structure that requires that cashflows be directed to an offshore SPV and then diverted back to the onshore SPV in order for the transaction to be considered a domestic transaction; or in pure cross-border fashion where the assets are sold to an offshore SPV, which then issues notes off-shore.