ABS devotees involved in the emerging markets east of Europe faced headache after headache last year.
At least one major problem morphed into a positive during the year, as the orderly winding down of major Kazakh programs backed by diversified payment rights (DPRs) in the face of their originators' restructuring proved a vindication of the asset class. A smaller program by Alliance is in the process of amortization, while the bank has defaulted on other debt.
But that is not enough to excite people about the CIS's prospects in 2010. Russia, in particular, looks a long way off from restoring its reputation as the next promise of existing asset ABS in EM, and deals with performance issues continue getting hit by fallout from the crisis.
There is incipient hope that Turkey could trot out deals this year, however. The country's two-notch foreign-currency upgrade from Fitch Ratings in December to 'BB+' from 'BB-' brings it one step closer to making existing asset deals viable.
Covered mortgage bonds in particular are in the air. "We have all the legislation in place. In theory it could be done, but a lot of factors limit potential issuers from issuing," said Batuhan Tufan, vice president of structured finance at GarantiBank. He added that while there is uncertainty about where the ratings on this product would be, they would likely fall in the 'BBB+'/'A' area, which is uncharacteristic for a covered bond in euros. "If such an issue would come to the market, it would be a test of the market," he said.
On the DPR side - where Turkey was a giant when the monolines were open for business - the challenge is getting activity restarted. But the incentives for originators are still not compelling enough.
"We are receiving positive feedback from arranger banks and investors stating that investors have appetite for securitization deals backed by DPRs," said a source at a Turkish bank. "However, the liquidity of Turkish banks is high, and when coupled with lack of demand for loans in the market, the outcome is that the cost of a securitization transaction is still considered high when compared to other available alternative funding sources."
The issue, in a nutshell, has been the same for a couple of years: pricing.
"We have received reverse inquiries, but we still have difficulty with pricing," GarantiBank's Tufan said. "The way we think about it is that DPRs are an asset class immune to sovereign risk and therefore we'd like to achieve a spread tighter than the Turkish sovereign, but investors are looking for spreads over Turkey." While he recognized that the relative illiquidity of DPR paper is part of the reason investors are seeking a premium, it should not, he said, push the spread past that of the sovereign.
Even though declining tourism revenue and last year's slowdown in the economy are eating into future receivables of Turkish DPRs, debt-to-service coverage ratios are cushy and can absorb a good deal of pressure. The originators themselves also remain quite healthy, having avoided the troubling asset deterioration of their peers in the U.S. and Europe.
In its upgrade of Turkey, Fitch noted the country's success in navigating through the global crisis, and an improvement in indicators that have dogged the country in the past such as inflation, external finances and political risk. This enabled the government to borrow locally at record low yields and issue a mega-euro bond amounting to $3.75 billion last year, creating the conditions for pursuing anticyclical policies without spooking financial markets.
In another ratings plus for the country, Standard and Poor's improved Turkey's outlook to stable from negative in September.
In Russia, given the dismal performance of many deals last year and the fact that the country was only getting its feet wet in securitization when the crisis swept the globe, the prospects for 2010 look dim. Among other issues, the currency troubles that had players biting their nails during 2009 have led to a realization of dreaded scenarios. An RMBS from Gazprombank, for instance, recently had a noteholder meeting to vote on a resolution that would convert the interest payments on Class A1 notes from euros to rubles, at a specific exchange rate. The swap once provided by Lehman Brothers Holdings is no longer there, and the swap rate under proposal is from the deal's closing, when the ruble was 22% weaker than it is today. The deal is now fully exposed to FX risk.
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