Developing eastern Europe’s markets has been a long-standing aim of Europe’s multilaterals. But it’s only recently that the region’s less developed markets have caught the eye of investors looking to diversify their bets.
Now, thanks to a new strategy pioneered by the EBRD, structured finance is taking off across central and eastern Europe. The institution is squarely at the forefront of efforts to develop a market for asset-backed securities in the region. Although the products are still rare, the multilateral is expecting a handful of deals to come to the rapidly expanding market this year.
The EBRD’s first ground-breaking securitization was launched this spring – a E300 million bond issued by Russian Standard Bank (RSB), backed by consumer lending, in a deal arranged by HVB, JP Morgan and Barclays Capital. It marked the first securitization in the institution’s region and, by all accounts, looks set to enliven Russia’s nascent capital markets while also making consumer finance more readily available.
“It has to be EBRD’s job to develop these markets,” says Kurt Geiger, group director of the EBRD’s financial institutions’ group. “The whole reason for being for the EBRD is to take risks in these markets.”
Jonathan Woollett, director for non-bank financial institutions at the EBRD, points out that the scope for securitizations has grown significantly in recent years. “There is a growing pool of receivables that can be refinanced in the capital markets,” he says. “The pool wasn’t large enough before for us to consider, and it was also less appealing to the international investment banks to look at securitization, but that has changed.”
Russian frenzy
He points to Russia, Kazakhstan, Romania, Bulgaria and Poland as promising markets for securitization. But Russia is in many ways at the head of the curve, where deals backed by consumer assets are proving especially popular.
Dresdner Kleinwort Wasserstein and Merrill Lynch launched Russia’s first securitization of diversified payment rights for Alfa Bank – the first securitization of future cash flows for a Russian bank. And Morgan Stanley brought a rouble denominated securitization of train leases for Russian Railways.
RSB hopes to issue at least twice a year from now on, and is doing preliminary work to securitize some of its credit card portfolio by the end of the year – the bank has a 66% share of Russia’s credit card market. HVB plans to bring a similarly structured securitization of credit cards to the term market for a Czech client. Meanwhile, MDM Bank is also planning a securitization of car loans, but it has not yet mandated a bank to arrange the deal.
Woollett attributes Russia’s appeal to the size of the pool of assets. There’s also the “brag factor” for big financial institutions hoping to be seen as the first in the markets, he says. “There will continue to be a lot of interest in Russian assets. People see the yield that can be earned there,” he adds.
There have also been deals in Kazakhstan. ABN Amro arranged a $150 million residential mortgage-backed bond for BTA Ipoteka, a subsidiary of Kazakhstan’s Bank TuranAlem.
No precedent
The EBRD paved the way for securitization two years ago when it began encouraging local banks to create assets that could be securitized. At the same time, the multilateral commissioned consultants,
financial agencies and associations to draw up a best-practice model for mortgage lending in the region.
But the lack of legal precedents means that bankruptcy laws remain – as yet – untested. One of the EBRD’s biggest challenges is understanding the quality of borrowers’ portfolios. Encouraging investors to participate is equally challenging.
Moreover, many of the region’s financial institutions remain underdeveloped. The EBRD points out that capital markets products are lacking while numerous legal and regulatory hurdles remain.
“Banks’ efficiency and risk management still require improvement, and most banks are not adequately prepared for the Basel II regulatory framework. The non-bank financial sector – including specialized institutions, leasing and pension funds – is still largely underdeveloped,” the bank said in a report.
This, however, is precisely where the bank’s role becomes important – to take risks in these markets. “One very important thing is that these early deals are properly structured. We want to guarantee that investors are getting the quality of paper that they would get on any other world-class, international deals.”
Thankfully for the EBRD, the institution has over a decade of experience of working with and investing in these markets and their institutions. “There are structures there that mitigate the co-mingling of risk,” says Woollett.
The bank is also actively supporting securitization structures for other assets too, such as leasing receivables, consumer credit and auto loans. Although most of the securitizations the bank is working on will be done in the international
capital markets, the next step is to develop local markets. “The idea is to make it work in places where there is a large pool of local funds, especially pension funds,” Wollett says. Russia and Kazakhstan are obvious contenders. But he points out that in the pipeline are deals in Romania, Bulgaria, Croatia and Ukraine.