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Kazakhstan fails to hold on to head start

04 Sep 2007

Thanks to BTA Ipoteka’s $150m deal, Kazakhstan has its first mortgage securitisation under its belt. However, progress elsewhere in the structured finance market, particulary in consumer ABS, has been painfully slow. Chris Dammers reports.

Kazakhstan’s banking market was liberalised long before Russia’s or most other CIS countries, as a result of several waves of privatisation during the 1990s. Private sector investors now own over 90% of the banking stock. Furthermore the industry has already undergone a wave of consolidation, leaving three banks - Bank TuranAlein, Kazkommertsbank and Halyk Bank in control of the majority of banking assets.

Combined with a boom in consumer finance this should have been a recipe for a thriving securitisation market. Looked at from one perspective it has been — several securitisations of diversified payment rights have been issued by thte big three in their quest for hard currency funds. But on the consumer ABS side — auto loans, mortgages and credit cards — Kazakhstan lags behind Russia despite its head start.

"As far as the market environment for securitisation goes, Russia and Kazakhstan are similar in that they both have rapidly growing retail portfolios, improved economic conditions, increasing wages and so on," says Daniel Mumzhiu, an analyst at Moody’s.

The key difference, however, is the relative size of their economies. Russia has nearly 10 times the population of Kazakhstan, making it much easier for large banks to accumulate the critical mass necessary for a securitisation to become cost effective. A minimum asset pool of $100m is generally required, given the high transaction costs and the difficulty of executing a debut securitisation.

So far only one bank has reached that threshold and brought a deal to market — BTA Ipoteka. As usual with an inaugural deal, it was a long process. ABN Amro provided a $150m warehouse in February and little over a year later the securitisation was termed out.

Breaking the ice

"It was the first mortgage securitisation in Kazakhstan and everything was untested," says Yerdaulet Baimukhametov, an official in the international department at BTA Ipoteka. "The local tax authorities and the national bank were uninformed about this type of transaction. Nobody had any real experience with this sort of transaction in Kazakhstan. They didn’t raise any real problems, because they understood securitisation has to be executed in Kazakhstan — we already had a securitisation law that had been drafted."

The law was passed in March 2006 but as in Russia, was of little use to issuers focused on the international market. The similarities continue in that many of the laws surrounding securitisation are untested in the courts, meaning that legal opinions are necessarily qualified and that ratings are tied to the bank’s financial strength even for existing assets.

"We feel that true sale works in optimum conditions but we’ve yet to see how it stands up in the event of bankruptcy of the originator," says Mumzhiu.

While domestic securitisations using the law directly are likely to come in time, offshore securitisations are likely to remain the norm for now. Kazakh banks have a strong desire for hard currency and have been prolific users of offshore borrowing in the unsecured markets in recent years — foreign debt doubled in 2006 to hit $33bn and has now reached $40bn, around half of their overall funds.

Offshore incentive

The government imposed limits on foreign borrowing in March 2007 to reduce banks’ exposure to currency risk. The restrictions, however, do not govern securitisations, giving issuers a powerful incentive to securitise in the offshore market, beyond the established investor base and cheaper interest rates.

"In future we would still be more interested in doing offshore securitisation, even with mortgages denominated in pure domestic currency, because we have already done the first transaction and have the experience," says Baimukhametov. "Everyone who has been working with us has the experience, and the local regulatory authorities are used to receiving information from us about offshore securitisation. In the long term future we would be interested in doing a local currency deal, but the second transaction will be offshore."

While other originators of existing assets have been slow to get off the mark, the year ahead should offer a variety of transactions, if not the sort of explosive growth seen in Russia. Diversified payment rights securitisations will continue to provide the bulk of dealflow however, assisted by an additional source of liquidity in the Asian Development Bank, which has guaranteed two transactions so far.

Away from the two most obvious asset classes, Mumzhui predicts that auto loan securitisations are likely to be the next most common asset class, while Kazkommertsbank is also contemplating securitising loans to small and medium sized enterprises. While this asset class has been a big growth area in Western Europe, the concentration of the Kazakh economy in a few sectors, dominated by mining and other raw material production, may prove disconcerting to investors.

04 Sep 2007