october 2006 securitisation in russia and cis the broad strokes and fine lines of securitisation...
TRANSCRIPT
October 2006
Securitisation in Russia and CIS
The broad strokes and fine lines of securitisation
landscape
2
Table of Contents
1 CIS Market Update 3
2 Future development of securitisation in Russia and Kazakhstan 8
3 Kazakhstan case study 16
4 Panel discussion 26
1 CIS Market Update
4
Market Economics: Glam or Glum?
Outlook
FITCH MOODY’S S&P
RUSSIA BBB+ STABLE Baa2 STABLE BBB+ STABLE
KAZAKHSTAN BBB STABLE Baa2 STABLE BBB- POSITIVE
Russian CDS spreads are at historic lows
Economic indicators
RUS KZT
GDP growth 7.40% 9.40% –
Unemployment 5.40ml – 0.11ml
Current Account 27.01bl 0.35bl
Trade Balance 12.05bl 4.10bl
CPI 9.60% 8.50%
0
20
40
60
80
100
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jul-0
5
Se
p-0
5
No
v-0
5
Jan
-06
Ma
r-0
6
Ma
y-0
6
Jul-0
6
Se
p-0
6
CD
S s
pre
ad
Kazakhstan Russia
5
Market Economics: Glam or Glum?
Demand for consumer goods/services is growing in line with rising consumer
confidence
Growing asset base for potential securitisation. In 2005 loans to households
in Russia doubled
Banking sector profitability remains strong
Some concerns over relaxed lending standards to mortgages
Gap between Russian banking sector rating (BB) and the credit quality of
their assets creates potential for further securitisation. Very similar situation
in Kazakhstan
Market innovation to grow as market has seen its first publicly-placed
consumer-loan ABS transactions
6
Market developments in EEMEA region
ABS volumes are dominated by Turkey and South Africa and followed by Russia
In 2006 ABS issuance in EEMEA region approached €4.1bil in the first 7 months compared to €
181.1bil generated in European market
Issuance evolves naturally from future flows to existing assets in positive credit cycle
Source: S&P, * to end July
EEMEA ABS issuance volume by country 2001 – 2006*
EEMEA ABS issuance 2001 – 2006*
Future Flows Existing Assets
0
1
2
3
4
5
6
7
8
9
2001 2002 2003 2004 2005 2006*
(EU
R B
il.)
7.8%
0.2%
33.4%
0.1%
1.4%
38.2%
12.2%2.6%
2.6%1.5%
Poland Russia Egypt
Rep. of Latvia South Africa Tunisia
UAE Turkey Czech Rep.
Kazakhstan
7
Market developments in EEMEA region
Residential mortgages (RMBS) expected to grow. Almost 80% of European market
The first Russian true sale ABS transactions completed in 2005 and currently actively driven by leases,
consumer loans, future flows and RMBS
Kazakhstan has seen its first true sale securitisation of residential mortgages in February 2006
In selected cases, future flow remains cost effective
Source: S&P, * to end July
EEMEA ABS issuance volume by asset type 2001 – 2006*
2006* EEMEA ABS issuance
Small business loansRMBSLeasesFuture flows
Credit cardsConsumer loansCMBSAuto loans
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Cze
chR
epub
lic
Kaz
akhs
tan
Pol
and
Rus
sia
Sou
thA
fric
a
Tun
isia
Tur
key
(EU
R B
il.)
56%
2%
1%
7%
2%
2%
2%
10%
1%
15%2%
Aircraft Auto loansCMBS Consumer loansCredit card EquipmentFuture flows LeasesOther RMBSSmall business loans
8
Recent CIS Transactions Originator Asset Class Amount
mlCountry Senior tranche
ratingSenior tranche pricing
Sep-03 Halyk Future Flows $100 Kazakhstan
Baa2 Private
Nov-04 Rosbank Future Flows $225 Russia Ba3/B+ 9.75 (fixed)
Jul-04 Gazprom Future Flows $1250 Russia -/BBB-/BBB- UST4.875 2012 +299
Dec-04 The Baltic American Enterprise Fund*
Existing Assets
$64.9 Latvia Aa2 LIBOR+75
Jul-05 Bank Souyz Existing Assets
$62 Russia Baa3 3m LOBOR+175
Dec-05 Home Credit & Finance Bank Existing Assets
€ 126.5 Russia Baa2 EURIBOR +250
Nov-05 JSC Russian Standard Bank Existing Assets
€ 300 Russia Baa2/-/ BBB EURIBOR + 165
Mar-06 Alfa Bank Future Flows $350 Russia Baa3 LIBOR+160
Apr-06 Russian Railways Existing Assets
RUR 12,570
Russia Baa2 8-3/8% cpn, priced at 101.252
Feb-06 BTA Ipoteka Existing Assets
$150 Kazakhstan
- Private
Feb-06 KKB Future Flows $200 Kazakhstan
Aaa/AAA/Baa1/BBB
1m LIBOR +24
Jul-06 Vneshtorgbank (VTB) Existing Assets
$88.3 Russia A1/BBB+/- 1m LIBOR+100
Aug-06 Russian Interregional Bank for Development
Existing Assets
$72.5 Russia Baa2 3m LIBOR+160bps
*Has been included for comparison reasons
9
Market Developments in CIS
Rapid expansion in consumer asset pool
Legal, tax and regulatory environment is better understood
ABS transactions are becoming an increasingly popular tool of funding in CIS
and Kazakhstan
Diversified funding source and improve cost of lending
Rating agencies are becoming more familiar with the legal framework,
macroeconomic situation, and the underlying assets to be securitised
2 Future development of securitisation in Russia and Kazakhstan
11
Lower Financing Cost
Extension of Tenor
Less Corporate
Covenants
Diversified Funding
Source
Less Price Volatility
Economics
Create Publicity
Capital Markets
Presence
No Dilution of
Corporate Funding
Strategic
Regulatory Capital
Relief
Match Funding to
Asset
Reduce Gearing
Release Loss
Reserves
Balance Sheet Management
Main Securitisation Drivers
12
Challenges for Market Expansion
Establishment of clear underwriting standards and collection procedures
Build up of loan portfolios with consistency … and credit quality
Proven track record for specific loan types
Set-up IT systems to accommodate securitisation requirements
Major Challenges for Originators
Major Market Challenges Development or refinement of the legal framework to facilitate true sale securitisations:
– Achieving an insolvency remote transfer of assets/loans– Proper protection of creditors and investors;– Efficient transfer of underlying securities (e.g. residential mortgage loans)
Clarification or ascertaining of tax positions
– Withholding taxes;– VAT– Stamp duties
Regulatory treatment for the portfolio sale
Development of a local SPV infrastructure and issuance of ABS notes in local currencies
13
What does the future bring for CIS …?
Future Flow to continue, especially for
– Countries where sovereign is below investment grade
– New capital market entrants
– To extend funding tenor
True Sale ABS structure for Existing Asset to dominate
New asset classes
Improved understanding of market standards yielding better rating outcomes and
wider investor demand
Despite challenges remaining for RMBS the demand for funding will lead to
steep growth
Local ABS subject to development of local investor community
Greater focus on regulatory capital treatment
14
The Crème de la Crème of Asset Classes in CIS
Short-term consumer assets that do not require security are easiest from a legal perspective
In addition these assets often have short tenors and high excess spread
Specifically, consumer loans and auto loans have been and will continue to be positive
Consumer assets will continue to grow
Residential mortgages will become increasingly popular and have the highest potential
In 2006 approximately 80% of European consumer ABS is RMBS
Challenges remain for RMBS
– Lack of efficient long-term FX swap market
– Questions regarding the ability of a foreign SPV enforcing security in an economic stress scenario
– Rapid appreciation of real estate prices in the CIS
– Relatively small amount of excess spread available to cover losses (4-9% vs. 20-30% for consumer assets) Despite these challenges the demand for funding will lead to steep growth in RMBS from the CIS
15
Funded vs. Synthetic Securitisation
To date all transactions in the CIS have been funded transactions
Funded transactions
Synthetic transactions
Can provide both funding and regulatory capital relief
– Will remain the choice for all but the highest rated issuers as asset securitisation will
continue to provide competitively priced funding
– Can provide ALM management by matching tenor of funding to tenor of assets
May be a good option for the highest rated issuers who would like regulatory capital relief but have
competitive funding alternatives (i.e. Eurobonds, syndicated loans, local bonds, funding from parent)
– Challenges remain for Synthetic securitisation
– Lack of super senior Credit Default Swap provider
– Lack of clarity on the views of the regulator and accountants
16
The Alchemy of Securitisation: Capital Relief
According to Russian statutory rules capital relief is based on a “legal approach”
Sale of assets provides de-consolidation of assets and off-balance sheet treatment of
these assets
Russian Regulatory Capital rules:
– Minimum ratio of total capital adequacy N1=10%
– Risk weighting is 100% for corporate loans, auto loans, retail loans
– For securitisation no specific accounting or capital adequacy rules
17
The Alchemy of Securitisation: Capital Relief
Scenario 1 Scenario 2
Portfolio of consumer loans of USD 100mln
• Risk weighted assets USD 100mln• Minimum ratio of Total Capital adequacy N1 = 10% • Risk Weighting Assets (RWA) = USD 100mln
Capital required = USD 10mln
Portfolio of consumer loans of USD 100mln
• Portfolio is sold to off-shore SPV • True sale (no recourse) • Credit enhancement = USD 10mln of
subordinated loan• After securitisation RWA of consumer loans
= 0%• Subordinated loan will result in RWA of
USD 10mln consuming the capital of USD 1mln
Capital required = USD 1mln
18
Unveiling Accounting Considerations
The accounting rules in Russia are changing towards IFRS. Basel II will be partly implemented in Russia in 2008-2009 (Minimum Capital Requirements, Pillar 1)
Contrary to the CBR statutory rules, IFRS uses a “risk transfer approach” for the de-recognising of assets
The following key questions should be considered:
– Does the Originator have to consolidate the SPV?
– Can the Originator / Seller de-recognise the assets on sale to the SPV?
For de-recognition of assets the two main criteria should be checked:
– Control
– Risks and Rewards
These rules are introduced by the revised IAS 39 which implements more stringent rules on consolidation of SPV and new tests for de-recognition
3 Case Study
First Kazakhstan RMBS Transaction
20
First one in Kazakhstan …
21
Securitisation Funding Solution
As is the case with many Originators in the CIS, BTAI had a relatively small but quickly
growing mortgage portfolio
As BTAI’s portfolio was not of sufficient volume to justify a Term Securitisation, ABN
AMRO structured a Warehouse to allow room for further origination
Warehouse funding can be refinanced at any time with no penalty
After a Term Securitisation is closed, the Warehouse will remain in place to fund the
BTAI’s ongoing loan origination
Example for Warehouse funding
Term Securitisation
020,040,060,080,0
100,0120,0140,0
0 3 6 9 12 15 18 21 24Months from close of Warehouse financing
EU
R m
ln
22
Warehouse Structure Overview The loans were sold to First Kazakh Securitisation Company B.V., a newly established
special purpose vehicle (SPV) located in the Netherlands The SPV is ultimately funded by an ABN AMRO-sponsored multi-seller conduit (rated
A1+ / P1 by S&P and Moody’s, respectively) The transaction is partially enhanced by political risk insurance provided by Multilateral
Investment Guarantee Agency, a subsidiary of the World Bank
First Kazakh Securitisation Company BV
First Kazakh Securitisation Company BV
ABN AMRO Bank Conduit
ABN AMRO Bank ConduitTrue Sale (KZ Law)Originator / Seller
/ Servicer(BTA Ipoteka)
Originator / Seller/ Servicer
(BTA Ipoteka)
Warehouse facility
BorrowersBorrowers Interest Rate Swaps
Interest Rate Swaps
Sub-LoanSub-Loan
Mortgage Certificates
[Notification of Sale]
SecurityTrustee
SecurityTrustee
Back-up Servicer(Halyk bank)
Back-up Servicer(Halyk bank)
[Loss-payee assignment]
AB
CP
Inv
es
tors
AB
CP
Inv
es
tors
Political RiskInsurer(MIGA)
Political RiskInsurer(MIGA)
CP
Calculation and Paying Agent
Calculation and Paying Agent
Liquidity Facility, Letter of Credit,
FX Hedging
Liquidity Facility, Letter of Credit,
FX Hedging
Custodian (Bank CenterCredit)
Custodian (Bank CenterCredit)
23
All collection proceeds to be daily transferred into secured offshore bank account
Security over collection accounts Subordinated loan provided by the Originator Trustee to monitor accounts
– Accelerated cash flow “waterfall” to apply following an event of default
– Trustee can take control of accounts in specified circumstances following an event of default
Back-up Servicer appointment from the start Parent servicing performance guarantee Certain portfolio performance triggers in place Underlying portfolio linked to foreign currency – daily
conversions Mortgage Certificates held by Custodian Contingent hedging arrangement Political Risk Insurance will cover risks of convertibility
and transferability of collections and expropriation of the collateral
Cost efficiency
– Allowed to raise financing at the level significantly cheaper than BTAI’s previous funding
Independency from parental funding
– The transaction allowed to diversify BTAI funding sources and to achieve less dependency on Bank TuranAlem
Increase of the funding amount
– Able to raise an amount of funding 5 times bigger that the largest international finance of BTAI to date
“Stepping stone” transaction for entering the term ABS markets
– Generating more data history
– Practice operational procedures
Structural Enhancements & Transaction BenefitsThe combination of “structural enhancements” allowed the company to raise funding at a very attractive cost
Benefits of the transaction Transaction structural enhancements
24
Execution – Major Challenges of the Transaction
SECURITISATION TRANSACTION
SECURITISATION TRANSACTION
Legal environment (foreclosure and court procedures)
Claw back from Originator Commingling Risk Fiscal Implications Regulatory approvals
True Sale Structure
Lack of historical data Unfamiliarity with
concept and documentation
New jurisdiction
Extensive due diligence phase Rating agencies had to set up
rating methodology for Kazakhstan
Extensive transaction documentation
Time consuming
Systems adjustments Changes in day to day
operations Accounting
Internal procedures
RATING PROCESS
DUE DILIGENCE STAGE
DO
CU
ME
NT
AT
ION
/ L
EG
AL
DU
E D
ILIG
EN
CE
ST
AG
E
25
Lessons from Kazakhstan and other EMs
In Kazakhstan the following points were confirmed:
– Local and international presence for third parties is key (bank, tax and legal)
– While Mortgage Certificates can offer a clean legal sale, operationally the sale can be very difficult (endorsements, custodian, etc)
– In the absence of historical data, limited information or even examples can give the Rating Agencies comfort
– The due diligence phase is more extensive than Originators anticipate
– The feasibility study will never resolve all issues – choose an arranger you trust to solve structural challenges
Lessons we have learned in other Emerging Markets jurisdictions:
– European investors prefer “simpler” structures
– If there is no data the Rating Agencies will take very conservative views
– Ultimate rating levels are not entirely independent from the Originator’s or country’s rating
– Investors can be unpredictable, involve the sales force early in structuring phase
26
Execution Challenges for Originator
Extensive transaction documentation in English
In depth due diligence by the Rating Agencies and the arranging bank
– Historical asset performance
– Underwriting criteria
– Servicing standards
– Experience with delinquency and foreclosure
Adjustments in internal systems and procedures
– IT systems
– Accounting procedures and internal instructions
– Reporting requirements for securitisation
Efficient and timely registration of Mortgages Certificates in the regions
27
Main parties to the transaction need to have local knowledge and presence as well as international experience with structured finance
Modification of offshore structures and precedent
Firsthand experience and solutions for challenging issues
Axioms for a successful transaction
SUCCESSFUL TRANSACTION
SUCCESSFUL TRANSACTION
Permits repeat low cost issuance
Target highest ratings to obtain widest distribution and tightest pricing
Securitise core assets
Ability and authorisation to make decisions
Customer franchise unaffected Less operational risk –
straightforward execution
Develop funding program around existing practices
Establish generic funding program
Use accomplished arranger and other third parties
Establish a dedicated deal team
28
Meet ABN AMRO Team
Gary Watmore, Executive Director, Global Head of Developing Markets Asset Securitisation
Tel: +44 20 7678 6288, Fax: +44 20 7678 3597, E-mail: [email protected]
Tim Vieth, Director, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 1949, Fax: +44 (0) 20 7678 3730, E-mail: [email protected]
Dan Stadnik, Director, CEEMEA Asset Securitisation
Tel: +44 20 7678 5827, Fax: +44 20 7678 3597, E-mail: [email protected]
Maria Bazhanova, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 4872, Fax: +44 (0) 20 7678 3730, E-mail: [email protected]
Alex Ivanov, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 2980, Fax: +44 (0) 20 7678 3730, E-mail: [email protected]
Natalia Joubrina, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 6819, Fax: +44 (0) 20 7678 3730, E-mail: [email protected]
4 Panel discussion
30
Making more possible