After a year or two of mounting expectation, Russia has finally seized the attention of structured finance investors and it appears it's not letting go anytime soon. In the last week of March, two Russian originators, Alfa Bank and Russian Standard Bank, floated structured deals into the public market for a combined $715 million, a compelling figure from a single emerging market country. And typical for a market like Russia that's new to structured finance, the transactions offered ground-breaking features.
Alfa, for its part, became the first Russian originator to tap diversified payment rights (DPRs), an asset class that Brazilian and Turkish banks have come to treat as a financing staple. The bank priced a five-year final, $350 million transaction on March 27, at 160 basis points over three-month Libor, roughly 60 basis points tight to the spread it has achieved with comparable unsecured financing, according to a source on the deal. Merrill Lynch and Dresdner Kleinwort Wasserstein were joint leads. Moody's Investors Service rated the bond Baa3'.
Slightly more than half the notes went to U.S. investors, with European buyers taking the bulk of the rest. Asia accounted for close to 5%. "The total number of U.S. investors was smaller but their tickets were larger, which fully vindicates the strategy of getting the deal to a 144A disclosure level," the source said. Buyers were by and large big names familiar with DPR transactions from other emerging markets. While established U.S. investors might have already purchased Alfa's unsecured paper offshore, as its debut 144A this was the first bond they were able to buy directly, the source said.
It's no secret that the originator chose only Moody's most likely because the agency tends to be more generous than its rivals in grading bank securitizations from emerging markets, but the single rating was apparently not much of a deterrent to investors, given that the deal was upsized from $300 million initially. Another source close to the deal said that the investors that bought in were the kind that run extensive in-house analysis of emerging market deals and thereby aren't as swayed by the level and number of ratings.
One investor who chose to stay away said that the bank's DPR business, while solid, lacked a long history, a concern that has dogged other Russian deals. Evidently, however, there are plenty of investors eager to get into Russia now.
DPR flows grew briskly from 2000 until 2004, when competition slowed the pace down, according to a Moody's report. Total collections averaged a 15.9% expansion from 2001 to 2005, hitting $14.1 billion in the final year. Historically, Alfa Bank has processed predominantly dollar-denominated payment orders, reaching 81.6% in 2005. Still, a growing portion is in euros. DSCR and currency triggers protect bondholders from the risk of a weakening euro eating into the flows in dollar terms.
The bank could issue more DPR transactions, said the source on
the deal.
The deal has a loan-pledge structure similar to future flow transactions by Russian issuers Rosbank and Gazprom. Mayer, Brown, Row & Maw and White & Case are legal counsel for the arrangers and originator, respectively. Alfa Bank is presently the largest private bank in Russia.
Elsewhere in the neighborhood, Russian Standard Bank issued the country's first public consumer loan deal for a total 300 million ($365 million), with April 4 set as the closing date. HVB Corporates and Markets was sole arranger and also joint lead along with Barclays Capital and JPMorgan Securities.
The bond was split into three tranches, all with a legal final of six years. Rated Baa2' and BBB' by Moody's and Standard & Poor's, respectively, the A1 series reached 228.3 million and priced at 165 basis points over one-month Euribor. Sized at 39.3 million, the A2 notes priced at 350 basis points over, with a rating of Ba2' and BB-', respectively. Carrying the same ratings, the A3 notes amounted to 32.4 million and priced at 325 basis points over one-month Euribor. All series have an expected maturity of three years.
Unlike Alfa, RSB kept to its side of the pond, selling the paper entirely to European investors, according to a source close to the deal. Buyers were a mix of ABS and emerging market investors.
As the underlying loans are denominated in rubles and the bond pays investors in euros, HBV is providing a hedge for the currency risk (ASR, 03/29/06).
RSB is a leading bank in Russian consumer financing, with a portfolio of 4.5 billion at the end of last year, according to an S&P report. Consumer spending in Russia has taken off since the turn of the century, growing by a 109% annual compound rate just since 2004, to hit RUR1.1 trillion (40 billion) in the second quarter of 2005.
RSB has glommed onto this burgeoning sector by providing short-term and easy-to-issue lending products at point of sales in retail shops. Due to the steep credit risks of lending to Russian consumers, the bank charges fat margins, S&P said.
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