IMF/World Bank 2007: New frontiers
Despite sub prime fears casting doubts over the future of European and US securitisations, the asset class in EEMEA and Latin America has so far proved resilient. Supported by strong appetite among local investors and a growing pool of assets to package, these EM markets remain poised for further growth. Anna Borrett and Christopher Langner report.
The securitisation markets in EEMEA and Latin America are growing in leaps and bounds. Despite the recent spike in risk aversion toward the asset class, strong local demand and the unique characteristics of structures emerging from these regions have helped maintain momentum.
So far US jitters have had little, if any, impact on risk perception, with participants forecasting more deals on the horizon. "Fitch has not changed the rating on any of its emerging market deals," said Michael Hoelter, director in emerging markets at Fitch. "The larger banks have other sources of funding, but smaller banks may not. These smaller banks may be more likely to carry on with MBS deals."
In EEMEA, several countries such as the Ukraine and UAE saw debut securitisations in the international markets this year. In July two internationally rated deals, an RMBS and a CMBS, were issued out of Dubai. The Ukraine also sold its first mortgage-backed deal at the beginning of the year.
Russia remains one of the biggest players, offering a variety of asset classes and substantial volumes. Over the last year the country issued its first domestic transaction, Sofintrade's Specialised Mortgage Agent GPB-Mortgage, and in early 2007 Citi launched the first domestic tranched RMBS, First Mortgage Agent of AHML. There has also been a steady stream of offshore transactions.
Market participants largely expect Russian securitisations to remain alive and well during the last quarter, though volumes may be dented somewhat until banks can assess the damage caused from the downturn in global markets.
"The mortgage market is booming in Russia, and the pipeline is fairly large," said Daniel Mumzhiu, an analyst at Moody's. "It is difficult to say how many deals will materialise, though, as larger banks are likely to hold back until credit conditions improve."
Other participants are more upbeat and don't expect any spill over from the US markets. Stephen Matthews, senior associate in the Allen & Overy structured finance group in Moscow, said that his clients do not see the credit crunch impacting flows in Russia, especially given the country's unique story and strong fundamentals.
"When the dust settles, it may even stimulate new enthusiasm among international investors looking for both yield and structural conservatism from the same bucket,” he said. “It's fair to say that Russian deals are structured cautiously. Thekey risks are now well understood and documented and in many cases can be significantly mitigated through mechanical techniques.”
Nevertheless, legal frameworks in emerging countries are often still developing, as governments aim to strengthen structures and encourage more volumes. Further amendments are to be made to Russia's domestic mortgage securitisation law, and Kazakhstan passed a securitisation law in 2006. Meanwhile, Turkey's parliament has recently implemented a mortgage law, which could result in future RMBS deals.
Some countries have been able to move forward without an established legal framework for securitisation. For instance, the Ukraine has experienced considerable growth in its mortgage market and the country saw its first public securitisation in early 2007, namely the Ukraine Mortgage Loan Finance 2007-1, a US$180m transaction originated by Privatbank and arranged by UBS. The issuer was an SPV incorporated under the laws of England and Wales, and political risk insurance was provided for the Class A notes by Steadfast.
The majority of the senior bonds were bought by typical European subordinated tranche ABS investors, whereas the majority of the sub notes were bought by emerging market investors. It was notable that neither of the rated tranches was wrapped.
Tamweel Residential MBS and UAE CMBS Vehicle 1 paved the way for further securitisation in the UAE. Both deals were issued out of Dubai in June this year. Tamweel Residential MBS was of particular significance as it was the first public Islamic RMBS from Dubai, originated by Tamweel, one of the chief Shariah-compliant home financing lenders in the UAE.
As an asset funding technique, securitisation is inherently compliant with Shariah, although there are still certain structural features such as hedging of transactions and tranching of debt which raise particular concerns.
“The Dubai residential mortgage market is still in its early stage of development and has not been through a proper credit cycle so people are not sure how things would work out if anything went wrong,” said Salim Nathoo, a partner at Allen & Overy.
UAE CMBS 1, via HSBC, was the first publicly rated CMBS deal from the region, although in this case the deal was not Shariah compliant. "Depending on investor appetite CMBS issuance out of Dubai has substantial potential," said Jaime Sanz, head of emerging markets at Fitch. "Demand for office space is huge and rents increased constantly over the past periods. New constructions are not yet making up the difference, leaving companies sometimes desperately seeking space to rent."
It is a similar story in Latin American countries such as Mexico, which still suffer from an acute housing deficit. Fueled by a government initiative to provide homes for low income families, Mexico mortgage lenders, known as Sofoles, provide an almost bottomless pool of mortgages. Sofoles have been increasingly looking to diversify their funding base as the government mortgage insurance agency SHF is phasing out its support.
The volume of RMBS issuance in Mexico during first seven months of this year is already 240% higher than 2006 overall, according to S&P. Until the end of July, US$4.1bn new mortgage-backed securities had been issued in Mexico, against US$1.7bn overall last year. Volumes are expected to grow further as banks have also started to securitise their mortgage pools.
HSBC and Banorte got the ball rolling earlier this year. Their move whetted the appetite of BBVA Bancomer, which commands over 60% of the mortgages held by retail banks in Mexico and is now mulling a similar deal.
If the current pace of issuance continues, RMBS issuance in Mexico could reach US$10bn a year by 2010. So far, issuance has met strong demand in local markets from pension funds and insurers. But analysts predict a pick-up in cross-border issuance, since there is only so much Mexican institutional investors can absorb.
Su Casita and Metrofinanciera have already broken ground in the international markets. Bankers are now awaiting a global RMBS by Infonavit, the government-sponsored mortgage lender. The quasi-sovereign is expected to issue a US$250m RegS/144A deal later this year or early 2008.
Infonavit accounts for 37% of the RMBS issuance in Mexico. While the agency will have to brave sub-prime fears, it is expected to tout the differences between mortgage loans in Mexico and the US. In Mexico, for example, most loans are insured by the SHF and require a 20% minimum down payment.
Mexican bankers have shown themselves to be particularly creative on the ABS front. They have securitised everything from bond holdings to ship and sport clubs receivables.
In Brazil the securitisation market got a boost with the creation of the FIDC in 2001, which provided a legal framework for ABS securities. However, the asset class did not take off until about 2004, since it had to weather first the market turmoil caused by Argentina's default and then the handover of power to leftist president Luiz Inacio Lula da Silva.
ABS issuance in Brazil jumped from R$1.5bn (US$805m) in 2003 to R$12.8bn last year. This year the pace has slowed down, with total approved and completed deals having reached only R$7.9bn, but the prospects for the asset class continue to be promising.
Brazil's RMBS market is also on the cusp of a boom. State-owned lender Caixa Economica Federal is expected to come out soon with a R$2bn RMBS offer, setting the stage for other retail banks to start tapping a market which, until recently was almost exclusively dominated by a couple of securitisation companies. Bankers believe seven to 10 banks a year will need at least R$1bn each in 2008. By 2010, this total is expected to rise to R$50bn.
This could boost a market that has suffered at the hands of the CVM, the local securities regulator. CVM recently required companies to count ABS funds as debt and not equity on balance sheets.
If events in Chile and Colombia are any sort of gauge, Brazil's ABS could be severely hurt by the new regulation. Both countries saw securitisation deal flow halt almost completely after local regulators implemented similar rules. Despite a largely positive outlook, the road ahead is not necessarily smooth given the untested legal frameworks of these relatively new markets.
“In emerging market transactions there is always a limited amount of information, and people have to learn as they go along," said Fitch's Sanz. "However these markets are developing along wise lines and are taking sensible steps.”