Russia's first mortgage backed security is remarkable for a number of reasons, but the most compelling is this: private housing in the country scarcely existed before the 90s. By historical standards, the country's move from private property to widespread home ownership to the birth of the mortgage has been more a breathless race than a gradual evolution. And last year, state-owned JSC Vneshtorgank (VTB) took the baton.

With Barclays Capital and HSBC as leads, on July 4 the originator issued a multi-tranche deal backed by dollar-denominated mortgages. A $74.2 million A' tranche, with a 28-year final and 3.6-year average life, priced at 100 basis points over one-month Libor. Fitch Ratings and Moody's Investors Service initially rated the deal BBB+' and A1', respectively. Only a month later, Fitch upgraded the rating to A-' after boosting the originator's rating.

While the asset class was new to investors, the bank and the country's rising fortunes weren't. Both worked to the deal's advantage, according to Michael Strange, director in financial institution securitizations at Barclays. "Most investors had heard of VTB - it's a big and reputable institution; that's a positive name check," he said. "Russia itself had performed very well economically, becoming investment grade relatively recently. That was a big tick as well."

The transaction was a watershed not only for the asset class. The International Finance Corp. - a multilateral in the business of providing guaranties on emerging market ABS and MBS - brought a new product to the table, the Guaranteed Offshore Liquidity Facility (GOLF). Key in hoisting the deal's rating past the Russian ceiling, the facility equals 18 months worth of Class A and B notes' interest and senior fees.

"A key goal of VTB was to structure a senior note class that could obtain a rating higher than Russia's foreign currency country ceiling," said Kevin Kime, senior financial officer at the IFC.

The guaranty covers the originator's obligation to provide dollars for debt service offshore in the event of a transfer or convertibility event. It works similarly as political risk insurance, but the focus is on the credit's ability to get its money abroad and not on the event itself, which would trigger a traditional PRI policy. The IFC also purchased a $10.6 million B' tranche, respectively rated BBB' and Baa2' by Fitch and Moody's.

The transaction's collateral consists of 1,696 mortgage loans denominated in dollars. Given that the borrowers largely draw salaries in rubles, a devaluation of the Russian currency would put a strain on the deal. The rating agencies tested for this contingency.

Geographically the mortgages are concentrated in the Moscow area, which accounts for nearly 90% of the collateral. The rest is owed on properties in the vicinity of Russia's second city, St. Petersburg.

As a Reg S, the transaction was sold only to European investors and one offshore U.S. account. So far, the deal has performed well, according to Strange. Six months from closing, none of the loans in the portfolio were demonstrating delinquency over 30 days.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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