More details have surfaced on a first-time public securitization from the Ukraine, an RMBS originated by PrivatBank (ASR, 1/29/07) and arranged by UBS. Expected to price towards the end of this week, $134 million in 3.4-year average, class-A notes is being talked at 200 basis points over one-month Libor. Meanwhile, a $37 million B tranche with a 7.2-year average life is being talked in the range of 375 to 400 basis points. Fitch Ratings and Moody's Investors Service have assigned respective ratings of BBB-'/'Baa3' to the A slice and B+'/'Ba3' to the B slice.
A first for Steadfast
At both agencies, the A notes stand above the country's foreign currency ceiling thanks to a political risk insurance (PRI) policy issued by Steadfast Insurance Co., a wholly owned unit of Zurich Financial Services. This appears to be the first public securitization from Emerging Europe that has Steadfast attached. The policy covers 12 months of senior expenses and interest on the A tranche in the event of an expropriation or currency inconvertibility event that blocks payment to the noteholders abroad. The acts that would trigger such an event would have to last for at least 180 days.
While helping mitigate sovereign risk, PRI doesn't wipe out the hazards of government intervention altogether, as anyone who held a PRI-insured deal from Argentina learned after the imposed pesification of all debt a few years ago. "Under some low probability scenarios, we believe that the government could re-denominate the mortgages in Hryvna and the noteholders would suffer great losses," said Stefan Augustin, assistant vice president at Moody's. "That's more a credit risk than a liquidity risk; it's not something that the PRI policy covers."
Quiet on the PRI front
Steadfast has been quiet in Emerging Markets in general since its own unfortunate participation in the Argentine blow-up, having provided a PRI on a deal from mortgage bank Banco Hipotecario Nacional. Like others from the sector, the dollar-denominated transaction was gutted when the underlying dollar mortgages were converted to peso mortgages by the government's sleight of hand, essentially cutting the greenback value of the collateral by two-thirds.
Recently, PRI from either Steadfast or its rivals hasn't been making much of an impact, as investors have been more than happy to take on sovereign risk in securitized and non-securitized deals. "Spreads are low so investors want to keep that risk," said an industry source familiar with PRI. What's more, ratings upgrades have diminished sovereign risk itself from a number of the larger emerging markets like Russia and Brazil.
One market source pointed out that a single-B corporate deal from a country with the Ukraine's credit profile would sell fairly easily in today's highly liquid climate, but an RMBS from the same place has to take it up a few notches to win investors over. "This is a securitization product, so investment grade's important," he said.
In its pre-sale report Moody's provided details on the collateral backing PrivatBank's RMBS. At the cutoff date in December the pool consisted of 10,828 loans averaging $17,141 with a current LTV of 76.6%. Geographically, the pool is scattered throughout the country, with 16.2% coming from the oblast, or state, of Dnepropetrovskaya, 12.9% from Kievskaya, and 8% from Zakarpatskaya.
As with other mortgages deals from the ex-Soviet Union, PrivatBank's RMBS raises legal questions. Mortgages in the country have a short history and the relevant laws are also young. Moody's Augustin said that presently the foreclosure process is fairly streamlined in the country, but that there have been relatively few cases to date.
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