Even though Eastern Europe has been identified a region ripe for securitisation since the early 1990s, the region still lags Latin America or Asia. But some recent high-profile deals have suggested that foundations are being laid in some of the region’s larger jurisdictions. By Alec Mattinson.
Kurt Geiger, of the EBRD, at a panel on the subject at the European Securitisation Forum’s 2006 conference in Venice said: “Europe is potentially a very big market for securitisation. We’re seeing big interest from many people in these countries and, although they might not all come to fruition, we have 10-15 deals currently in the pipeline.”
As with many emerging structured finance markets, future flow transactions characterised early activity, as such deals constitute simple and secure financing. Turkey and Russia have both seen energy-based deals, and Kazakhstan has seen a number of diversified payment receipt (DPR) transactions.
Russia is at the forefront of the region’s growth. In 2004, Gazprom came to market with a US$1.25bn structured export note. The deal, backed by current and future receivables, opened up Russian issuance to a wider investor base and soon afterwards, Rosbank went on to launch Russia International Card Finance, backed by credit card receivables.
Russia's first securitisation of auto loans and the first Russian ABS supported by local receivables came in 2005 under Russian Auto Loans Finance arranged by Greenwich Financial Services and Moscow Narodny Bank.
In March 2006 three Russian deals came in as many weeks, opening up three new asset classes in the country. First to price was Russian Standard Bank’s €300m Russian Consumer Finance transaction via HVB; followed by Alfa Bank’s US$300m Alfa Diversified Payment Rights (through DrKW/Merrill) and Russian Railways’ R13.8bn (US$495.5m) Red Arrow International Leasing through Morgan Stanley/CIT Finance Investment Bank/TransCreditBank.
Important breakthroughs have been seen in other jurisdictions, too. DrKW and Raiffeisen Zentralbank Oesterreich closed the first deal from Eastern Europe to use the KfW platform. ROOF CEE 2006-1 securitised a pool of SME loans granted to Polish and Czech SMEs, marking the first SME deal from the region.
Microfinance lending to entrepreneurial enterprises in developing countries has also as another new asset class in recent months, following Morgan Stanley’s launch of the US$106m BOLD 2006-1 issue for specialist asset manager BlueOrchard Finance.
There are a couple of potential issues that may inhibit growth. First, there is a question over whether investor demand is sufficient to absorb the potential growth in issuance from the region. “Most of the existing transactions have been funded through the balance sheets of banks or conduits, with not a huge amount of placement,” said Frank Volz director, asset securitisation, Central & Eastern Europe at ABN AMRO. “Investor sophistication in the area is not quite there yet.”
Additionally there are regulatory complications that could impact the ability to arrange true-sale deals. There is great disparity between the region's legal systems and their respective approach to securitisation. Poland, Bulgaria, Hungary and Russia have all made attempts to enact securitisation legislation, but this does not necessarily fuel growth.
The lack of tried and tested securitisation-specific legal frameworks means each arranger has to overcome problems related to bankruptcy and the extent to which the SPV will be protected from insolvency. Most arrangers will opt for an offshore SPV, thus creating a more complex structure, with other tax regimes being involved and the extra time and expense that incurs.
There is also a potential issue over the identification of assets that can be securitised and there is often little historical data available in terms of historical asset performance. Additionally, deals can also run into problems surrounding banking secrecy and data protection laws, which prevent the distribution of personal details.
The true test of the market will be to what extent a true-sale securitisation market can be created in these countries. An MBS deal has already come from Latvia, but more deals are around the corner – Vneshtorgbank recently (VTB) mandated Barclays Capital and HSBC for a US$100m securitisation of its mortgage portfolio, for example.
BTA Ipoteka’s US$150m deal via ABN AMRO was billed as Kazakhstan’s first true-sale mortgage securitisation, although it is perhaps more comfortably defined as a conduit transaction.
There is also the potential in the region for the growth of securitisation supporting state backed projects, which may become especially the case as countries manage their budget deficits with one eye on entry to the euro.
Though structured finance deal flow is more of a trickle than a deluge, Jorg Wulfken of law firm Mayer Brown Rowe & Maw and a panel moderator at the ESF's Venice conference, was upbeat: “There is a lot of interest in the region, and I’m optimistic – those delegates who chose to go to other panels over this one may live to regret it."