The first publicly-syndicated Russian consumer loan securitization, the E300 million deal that closed in April for Russian Standard Bank (RSB), is the harbinger of a potentially gigantic market for western lenders.
“Securitization of domestic receivables was a $500 million market last year. It will be about $2.5 billion this year, $5 billion next year, and it won’t stop there”, says Tim Nicolle, deputy head of European securitization at HVB, which arranged the RSB deal.
“Outside the first world economies, Russia is going to be the big market. The volume of securitizations will soon outstrip the whole of east Asia minus Japan, which has about $4 billion of this type of debt.”
Such asset-backed securitizations provide exposure to nothing less than Russia’s first-ever real consumer boom. The extremely rich have already been around for 15 years, but the moneyed middle class has only put down its roots since the 1998 crisis, thanks to the high commodity prices that have been the bedrock of Putinite stability and growth.
They are gorging on credit card lending (market volume is an estimated $4 billion), and loans for cars and consumer goods, usually issued at the point of sale (another $4 billion). The next big thing will be mortgages – also around $4 billion, but expected to start expanding steeply in two or three years’ time.
The upside in Russia’s consumer boom is constrained only by barriers to GDP growth, which will probably only go up when oil prices fall substantially. Levan Zolotarev, RSB senior vice-president, says: “With the growth of Russian economy in general, and banking assets in particular, we anticipate growing use of asset-backed financings.”
The growth will be driven by “the expansion of consumer lending, the use by banks of asset-backed securities to diversify funding, and the lower cost of funding compared to Eurobonds”, Zolotarev says.
He adds that RSB has mandated arrangers for two further loans of about E300 million each – one securitization of car loans and one of credit card borrowing – that should be in the market by the year end.
“The increase in consumer lending is due to ordinary people having more confidence in the future,” Michael Strange, director (financial institutions securitization) at Barclays Capital, says. Barclays and JP Morgan were joint lead managers and bookrunners on the securitization.
“There’s huge scope for growth, and the biggest scope of all is on mortgages,” Strange adds. “President Putin has made the provision of readily-available mortgage finance a strategic goal.” In July, Barclays arranged Russia’s first mortgage-backed securitization, a $90 million deal for state-owned Vneshtorgbank.
RSB, whose major shareholders are its chairman Roustam Tariko, BNP Paribas (more than 45%) and the IFC (6.42%), is a recognized leader in consumer finance among domestic banks. Its focus on the retail market is in contrast to the strategy of Alfa and MDM, the two largest privately-owned institutions, which are striving to be universal banks.
Access to middle-class borrowers in the Russian regions, outside Moscow and St Petersburg, is a strong weapon in RSB’s arsenal. Only 15.7% of the receivables on which the securitization deal is based are in Moscow, 7.5% in St Petersburg, with the rest divided among the other large population centres.
The RSB deal securitizes a revolving, diversified E300 million portfolio of more than 2.1 million consumer loans, with an average life of three years and a final maturity date in January 2012. HVB has hedged interest and exchange rate risks.Three classes of notes have been issued, with a higher-priced paper issued to the EBRD and IFC to mitigate commingling losses:
• E228.3 million-worth of Class A1 senior asset-backed fixed-rate notes, rated BBB/Baa2 with a coupon of one-month euribor + 165 bps, and placed in the capital markets;
• E39.3 million-worth of Class A2 senior asset-backed fixed-rate notes, rated BB-/Ba2 with a coupon of one-month euribor + 350 bps, pre-placed with the EBRD;
• E32.4 million-worth of Class B mezzanine asset-backed fixed-rate notes, rated BB-/Ba2 with a coupon of one-month euribor + 325 bps, pre-placed with the EBRD and IFC.
Zolotarev of RSB says that the deal was “extremely well received”, with 40 investors in 10 jurisdictions participating. “Investors in our previous consumer loan securitization had to look at currency risk and commingling risk. In this year’s transaction, these risks were appropriately mitigated.
“This, together with RSB’s success story in the Russian consumer finance market, positive expectations in relation to the Russian economy, risk diversification from an investor point of view, made the deal successful.”
Strange at Barclays Capital says: “This structure means that the A1 notes, which were very well received in the markets, are protected from RSB bankruptcy risk.” He says that RSB could be expected to be upgraded in line with Russian sovereign upgrades. —Simon Pirani