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Showers Today, Clearer Tomorrow
Securitization in Central & Eastern Europe and CIS
by Patrick Butler, Managing Board Member at Raiffeisen Zentralbank (RZB), Responsible for Treasury and Investment Banking
Despite recent market turmoil, ‘plain vanilla’ term-securitization is well-established in the US and western European markets. Substantial growth is now imminent in both Central and Eastern Europe (CEE) and CIS. RZB is a substantial player in these markets, with two asset-backed securitization programs in CIS totalling $600m, one backed with auto loans and the other residential mortgage-backed (RMBS). Many corporations rely on asset-backed securities for their medium- and long-term investments due to their strong credit, liquidity and reliability of returns but confidence in these investments has been shaken following the US sub-prime crisis. We believe the nascent CIS and CEE securitization markets are well-positioned to weather the credit storm and prove reliable for investors with strong investment opportunities and the absence of a sub-prime market. Issues up to now have benefited clearly from the need to convince investors that the CEE/CIS risk was not compounded by further structured risk. As past deals repay, in full and on time, confidence will be bolstered. In this article, we look at some of the activities and trends in the regional securitization markets and the outlook for the coming year.
Market activity 2007
Although there was little securitization activity in the CEE countries during 2007, we see increasing opportunity during 2008, including multi-jurisdiction issuances.
CIS, Kazakhstan and Ukraine had their first securitizations of existing assets in the form of residential mortgage-backed transactions while Russia launched seven transactions: four mortgage-backed, two diversified payment rights (DPR) and one auto loans. Russian securitization transactions are also increasing in complexity and quality. The Agency for Housing and Mortgage Lending’s (AHML) first residential mortgage-backed security was also the first domestic transaction to use tranching, DeltaCredit’s residential mortgage-backed transaction was the first in Russia to use a principal deficiency ledger (PDL)6 mechanism. RZB’s USD 400 million auto-loan deal was the first in its asset class to achieve a single A rating in Russia.
Opportunities in CEE
2007 continued an extended period of strong economic growth in the region. 2006 has shown record high foreign direct investment (FDI) levels, with USD 14 billion in Poland and USD 5.95 billion in the Czech Republic, with CEE countries benefiting from relatively low labour costs and improving levels of productivity. Although many banks have been busy with the implementation of Basel II, commercial and retail lending activities continue to boom following good results and strong economic prospects. The economies of Central and Eastern Europe are also often viewed as an attractive gateway to the prospective markets of the CIS. With both inflation and foreign exchange rates remaining stable, the flourishing business environment has resulted in strong GDP growth rates (see fig 1).
Strong GDP growth, coupled with low interest rates and high consumption levels, has led to an economic boom in real estate resulting in a growth in mortgages as well as other forms of lending. The potential asset pools are therefore sufficiently sizeable to consider securitization as a viable option, despite the existence of a traditionally strong covered bonds market.
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