The turmoil in emerging markets isn’t a re-run of the Asian and Russian Crises of the late 90s, which led to financial havoc and steep recessions in various countries.
It is true that countries including Argentina, India, Russia, South Africa and Turkey have suffered sharp losses to their currencies as the U.S. Federal Reserve tapers its massive stimulus program, resulting in an abrupt switch in capital flows away from the developing world.
Part of the turbulence — in Turkey and Thailand, notably — also has a strong political accent, but in general the emerging market world is financially in a stronger place than in the late 90s. Most governments have much higher reserves than they did back then, should they have to defend their currencies. In addition, foreign lending is a smaller share of the total in many of these countries, particularly in Asia.
“What’s happened is that the emerging economies have become their own standing market,” said Erick Hernandez, director of Latin America origination and structuring at Alsis Funds.
Indeed, by all counts, the ratio of local-currency to foreign-currency funding in the universe of emerging market fixed income has exploded since the 90s.
“Nonetheless there are still going to be correlations between what happens within these regions and the U.S. and Europe,” he said.
Currency weakness still has not hurt the performance of securitization deals.
“When we analyze the credit performance on many of the securitized assets that we have seen in these markets and the recent market volatility, there is no evidence of immediate correlation” explains Juan De Mollein, lead analytical manager for emerging markets structured finance at Standard & Poor’s. “That is why you have not seen, at least at the moment, the level of impact in the credit conditions as seen in other past crises.”
De Mollein was speaking about the emerging markets of South Africa, Russia and Turkey, but the story is similar for the Latin American markets.
Eric Gretch, senior director of emerging markets on S&P’s structured finance ratings team, points out that today several Latin American countries have investment grade ratings. In comparison, in the late 1990’s and early 2000’s, most were non-investment grade. “In many instances, you now have countries in Latin America with deeper domestic capital markets, whereby borrowers are able to access relatively cheaper funding,” said Gretch. “They are no longer as dependent on cross-border financing.”
This holds as true for securitization as debt funding in general in Latin America. Gretch said that in the Latin American structured finance market, “there is less concern with short-term global interest rate movements and external market factors."
Russia, for example, introduced a securitization law in December that will faciliate the issue of non-RMBS securitizations. The law will potentially open up the domestic market for asset-backed securities by creating local special purpose vehicles with a stronger legal underpinning.
Ruble Takes Over
While the legal framework for asset-backed securities has yet to be implemented, issuance of Russian RMBS rated by Moody’s Investors Service reached a record of nearly RUB100 billion ($2.9 billion) last year. The market has far surpassed the previous peak of RUB40 billion in 2008.
In a report, Moody’s forecast RMBS issuance of between RUB100 billion and RUB110 billion this year, with several issuers making a debut appearance.
In an extreme example of what has been happening throughout EM, all of Russia’s mortgage securitization since 2009 has been domestic. This, from a market that pre-crisis was growing quite quickly on the cross-border front and was even joined by other assets such as car and consumer loans.
Russia has already seen one securitization issued this year (CISC Mortgage Agent VTB BM1, totaling RUB 23.36 billion) and there are at least two or three more transactions due out by the spring.
Moody’s expects state-owned agencies AHML and Vnesheconombank (VEB) to remain deep-pocketed buyers of RMBS. The former — also an issuer — has confirmed its annual repurchase program of RUB40 billion while VEB has about RUB66 billion left for its RMBS investment program, which is slated to wind down this year. Moody’s anticipates more demand from private-sector investors as well, which might help offset VEB’s exit.
On the consumer side, the agency said it expected new ABS transactions in 2014, which will use either the quasi-domestic structure or Russia’s new securitization law.
In November 2013, Moody’s rated the first Russian ABS transaction since the crisis, the RUB 5 billion HC Finance LLC, originated by Home Credit & Finance Bank. The deal is the first ruble-denominated Russian consumer loan ABS deal issued in Russia. The agency said in the report that the “successful launch of the first Russian domestic ABS deal may encourage further ABS issuance.”
Despite the fragile Russian economy and a decline in portfolio quality, Moody’s expects that the portion of past-due loans will remain stable this year. The agency also pointed to a fundamental strength of Russian collateral: the local MBS law prohibits LTVs of over 80%.
But further down the road, weaker economic conditions could “pose risks” to the sector’s stable performance, Moody’s said. And there is the potential for contamination of RMBS’s credit ratings via counterparties — the agency has had the Russian banking system on negative outlook since October 2011.
Despite substantial growth since early 2010, the total outstanding mortgages in Russia remain a paltry 3.2% of GDP. In developed countries, it’s typically much higher, with the figure at 65% of GDP in the U.S. and a 100% among the mortgage-loving Danes and Dutch.
Turkish DPRs Resilient
Macro issues haven’t immediately undermined the performance of Turkish securitizations either.
Turkey doesn’t have a large domestic securitization market. The main asset class that has been securitized are diversified payment rights (DPRs), which have been entirely issued on the cross-border front. A DPR transaction is a future flow asset class consisting of all the electronic money that flows through a bank, such as export payments and remittances from nationals living abroad.
“This asset class tends to be resilient to volatile times because these specific funds flowing through the financial system benefit from offshore cash trapping mechanisms, are relatively stable and legally isolated from the issuers of the securitizations,” said De Mollein.
In addition, export growth and relatively low issuance since 2009 has boosted the debt-service-coverage ratio of Turkey’s DPR transactions. DSCR is a key metric for DPR deals, measuring the tested collections against the remaining debt service amount on any given payment date. In a recent report, Moody’s said, for its six rated Turkish DPR deals, the DSCR was 88 mid last year, from 80 in June 2012. This degree of coverage indicates that flows could fall precipitously and debt payments would still easily be met.