Abridged from a report by Greg Kabance, senior director, Fitch

Structured finance transactions have been one of the few avenues available for borrowers in emerging-market countries to achieve investment-grade ratings. Most developed-market securitizations only concentrate on the protection of the underlying assets from the bankruptcy of the generating entity. When analyzing an emerging market securitization, Fitch must also analyze the country risks that could disrupt the underlying cash flows of the transaction. Such risks include potential restrictions on the transfer of hard currency out of a country, restrictions on the convertibility of local currency to hard currency, devaluation and exchange-rate risk, and certain degrees of expropriation. In a properly structured transaction, these risks should be mitigated.

The 2001 Turkish crisis

Against a background of increased financial volatility, Fitch has outstanding ratings on 16 Turkish structured-finance deals, all originated by banks operating in the local market. While two of these deals breached reacquisition triggers and were subsequently downgraded, all other Fitch-rated structured deals remained unchanged and performed well during the crisis.

Two deals, Iktisat G-7 Payment Rights PLC and Disbanks TFT Payments Rights PLC, triggered reacquisition events due to the lowering of the local currency rating for all Turkish banks. Disbanks, TFT Payments Rights PLC's deal, has now been repaid due to adequate receivables being captured within the structure over the past two months. In the G-7 Payment Rights PLC transaction, Iktisat was subsequently taken over by the Deposit Insurance Fund and experienced a dramatic fall in the level of receivables generation. However, average daily receivables generation is currently recovering strongly, with 100% of flows continuing to be captured offshore.

The current economic crisis in Turkey should have minimal effect on receivables generated in the credit card voucher deals. We expect minor stresses on the Turkish economy will not have a negative effect on the performance of the Akbank T.A.S. and Turkiye Garanti Bankasi A.S. credit card voucher deals, as both originators represent top-tier banks with a well-diversified business benefiting from excellent relationships with key merchants.

Transactions originated by Vakif Bank and Interbank/AKK fully redeemed during 2000. Despite stress scenarios Interbank being taken over by the SDIF, these transactions continued to perform.

In December 1999, Fitch rated Turkey's first on-shore securitization of Garanti Leasing, a leasing subsidiary of Turkiye Garanti Bankasi A.S., at BBB'. As of April 2001, cumulative delinquencies were approximately 2.65%, well-below deal trigger levels, and no losses have occurred. Despite some difficulties for local obligors making hard currency indexed payments, this deal continues to perform well with total credit enhancement above the initial requirement.

Pakistan debt crisis (19982001)

In 1997, Fitch rated a securitization of Pakistan Telecom's (PTCL) net settlement receipts. The receivables in this type of transaction are the net amounts generated by tariffs that one company owes to another for the use of its telecommunication infrastructure when completing international calls. Fitch rated the transaction BBB-', which was above the foreign currency rating of Pakistan. This rating meant the transaction had a much lower probability of default compared to the sovereign's probability of default.

Rating the transaction above the local currency rating of PTCL and the sovereign signifies that Fitch believes the net settlement cash flows would continue to pay offshore investors even during a default on local creditors. Over the last four years, Pakistan and PTCL's credit quality has deteriorated. Due to this decline in credit quality and an increased risk of these cash flows being disrupted, Fitch downgraded the transaction to BB'.

While Fitch does not currently rate Pakistan, the BB' rating on the transaction would be 5-6 notches higher than what we believe the sovereign rating to be. This rating differential reflects Fitch's opinion that the performance risk of the net receivables going to investors remains relatively low compared to Fitch's view regarding the sovereign's creditworthiness in the current stressed environment.

Indonesian crisis (19982001)

Bunas, an Indonesian finance company, offers a unique example of the performance of an existing asset transaction in an economy under severe stress. Bunas securitized its auto loan receivables in early 1997. Fitch rated the transaction BBB' for the following reasons: high-quality obligor pool; sufficient diversification; seasoned loans; fixed interest-rate loans; rupiah-denominated loans; a swap with a highly rated counterparty that guaranteed a fixed number of dollars offshore as long as the onshore account received the predetermined amount of rupiah; credit enhancement of 20%; and an adequate back-up servicing plan.

Shortly after this transaction closed, the financial crisis began in Indonesia. While the economy was in a tailspin, this securitization continued to perform at a level similar to the precrisis environment. The major reasons for this were the types of loan payments, the increasing inflation rates, the quality of the obligors and the swap counterparty. Other relevant points relate to the bankruptcy of the originator. Bunas defaulted on all of its major creditors, yet due to the strength of the securitization, it was completely paid down. There are two important reasons for this. The first is that the assets were sold off the company's balance sheet and, therefore, no other creditor was able to successfully attack these assets. While the structure achieved a true sale under Indonesian law, it is uncertain to what extent this sale was legally challenged. However, this sale and the mere fact that these receivables are no longer on the company's balance sheet offered certain protections to investors.

The second reason is that although Bunas defaulted on its debt, its creditors did not immediately liquidate the company and Bunas continues to service the loans. Bunas' servicing capabilities were essential to the performance of the transaction.

Philippine Airlines

While Fitch has rated a variety of airline ticket receivables transactions, Philippine Airlines (PAL) completed a five-year unrated bank transaction in 1997. This transaction securitized PAL's U.S. ticket receivables. The airline was highly levered and, due to the Asian crisis, the company's overall yield had significantly declined.

On June 19, 1998, PAL filed a petition for rehabilitation under the Philippine bankruptcy code, and all payments due from PAL were suspended on any debts prior to June 23, 1998. While there was no explicit judgement, the ABS transaction was not interfered with because it was considered a sale of receivables and not an outright borrowing. During September of 1998, two of PAL's planes were seized by U.S. marshals after the company announced it would be suspending flights to the United States. This suspension was caused by a breakdown in negotiations with its labor force. The suspension affected both domestic and foreign flights. Foreign flights were suspended for a little more than one month, but cash flows in the deal were sufficient to cover this delay in collections. Shortly thereafter, the planes were released on order of the San Francisco, Calif. bankruptcy court.

During March 1999, the company submitted a rehabilitation plan to the Philippine government and one month later resumed debt obligations. Most creditors' payments were restructured with the unsecured creditors taking the largest discount. The USEXIM, certain European ECAs and the ABS investors received the most favorable treatment.

During the suspension of payments, the structured transaction was triggered and the structured captured all cash. This cash was not paid to investors and was released to the company after the rehabilitation plan was approved. While certain future flow securitizations are structured with a "true sale," they may have recourse back to the company as well. The PAL transaction was structured in this manner, and therefore investors could have exercised their right of recourse. They chose not to do this as it may have jeopardized their position of not being "creditors," but being the counterparty to a sale of these receivables. If they enforced on this recourse they may have highlighted that the transaction has certain debt characteristics making them susceptible to a restructuring.

The PAL case study supports Fitch's airline ticket receivables rating methodology. In general terms, Fitch believes these types of transactions are senior to unsecured creditors and, in some cases, senior to other secured creditors. However, it is essential that the airline continues the routes and that other creditors do not successfully seize the aircraft used for these routes.

Conclusion

As structured finance continues to evolve in emerging markets, Fitch has rated a variety of types of deals. These deals include future flows, existing assets and political-risk insured deals. While these deals all differ in structure, their main purpose is to protect against sovereign and/or corporate risk. Over the past 10 years, these 148 transactions, rated investment-grade by Fitch, have gone through many country and company stresses. However, the transactions have continued to pay even when the sovereign or company did not.

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