Securitisation in Russia and CIS
The broad strokes and fine lines of securitisation
landscape
October 2006
Table of Contents
1 CIS Market Update
3
2 Future development of securitisation in Russia and Kazakhstan
8
3 Kazakhstan case study
16
4 Panel discussion
26
2
1 CIS Market Update
Market Economics: Glam or Glum?
Outlook
FITCH
MOODY’S
S&P
RUSSIA
BBB+
STABLE
Baa2
STABLE
BBB+
STABLE
KAZAKHSTAN
BBB
STABLE
Baa2
STABLE
BBB-
POSITIVE
Russian CDS spreads are at
historic lows
Economic indicators
RUS
80
KZT
GDP growth
7.40%
 9.40%
–
40
Unemployment
5.40ml
–
0.11ml

20
Current Account 27.01bl  0.35bl

Trade Balance
12.05bl  4.10bl

CPI
9.60%
 8.50%

Kazakhstan
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
0
Jan-05
60
Nov-04
CDS spread
100
Russia
4
Market Economics: Glam or Glum?

Demand for consumer goods/services is growing in line with rising consumer
confidence

Growing asset base for potential securitisation. In 2005 loans to households
in Russia doubled

Banking sector profitability remains strong

Some concerns over relaxed lending standards to mortgages

Gap between Russian banking sector rating (BB) and the credit quality of
their assets creates potential for further securitisation. Very similar situation
in Kazakhstan

Market innovation to grow as market has seen its first publicly-placed
consumer-loan ABS transactions
5
Market developments in EEMEA region
EEMEA ABS issuance volume by country 2001
– 2006*
2.6%
1.5%
EEMEA ABS issuance 2001 – 2006*
9
2.6%
12.2%
8
7
7.8%
6
0.2%
(EUR Bil.)
38.2%
1.4%
33.4%
0.1%


4
Future Flows
Existing Assets
3
2
Poland
Russia
Egypt
Rep. of Latvia
South Africa
Tunisia
UAE
Turkey
Czech Rep.
Kazakhstan

5
1
0
2001
2002
2003
2004
2005
2006*
ABS volumes are dominated by Turkey and South Africa and followed by Russia
In 2006 ABS issuance in EEMEA region approached €4.1bil in the first 7 months compared to
€ 181.1bil generated in European market
Issuance evolves naturally from future flows to existing assets in positive credit cycle
Source: S&P, * to end July
6
Market developments in EEMEA region
EEMEA ABS issuance volume by asset type
2001 – 2006*
1.4
1%
Aircraft
CMBS
Credit card
Future flows
Other
Small business loans
Auto loans
Consumer loans
Equipment
Leases
RMBS
0
Auto loans
Future flows
CMBS
Leases
Consumer loans
RMBS
Turkey
56%
0.2
Tunisia
1%
0.4
South
Africa
7%
0.6
Russia
2%
0.8
Poland
2%
1
Kazakhstan
10%
1.2
Czech
Republic
2%
2%
(EUR Bil.)
2% 15%
2006* EEMEA ABS issuance
Credit cards
Small business loans

Residential mortgages (RMBS) expected to grow. Almost 80% of European market

The first Russian true sale ABS transactions completed in 2005 and currently actively driven by
leases, consumer loans, future flows and RMBS

Kazakhstan has seen its first true sale securitisation of residential mortgages in February 2006

In selected cases, future flow remains cost effective
Source: S&P, * to end July
7
Recent CIS Transactions
Originator
Asset Class
Amount
ml
Country
Senior tranche
rating
Senior tranche pricing
Sep-03
Halyk
Future Flows
$100
Kazakhst
an
Baa2
Private
Nov-04
Rosbank
Future Flows
$225
Russia
Ba3/B+
9.75 (fixed)
Jul-04
Gazprom
Future Flows
$1250
Russia
-/BBB-/BBB-
UST4.875 2012 +299
Dec-04
The Baltic American Enterprise
Fund*
Existing
Assets
$64.9
Latvia
Aa2
LIBOR+75
Jul-05
Bank Souyz
Existing
Assets
$62
Russia
Baa3
3m LOBOR+175
Dec-05
Home Credit & Finance Bank
Existing
Assets
€ 126.5
Russia
Baa2
EURIBOR +250
Nov-05
JSC Russian Standard Bank
Existing
Assets
€ 300
Russia
Baa2/-/ BBB
EURIBOR + 165
Mar-06
Alfa Bank
Future Flows
$350
Russia
Baa3
LIBOR+160
Apr-06
Russian Railways
Existing
Assets
RUR
12,570
Russia
Baa2
8-3/8% cpn, priced at
101.252
Feb-06
BTA Ipoteka
Existing
Assets
$150
Kazakhst
an
-
Private
Feb-06
KKB
Future Flows
$200
Kazakhst
an
Aaa/AAA/Baa1/
BBB
1m LIBOR +24
Jul-06
Vneshtorgbank (VTB)
Existing
Assets
$88.3
Russia
A1/BBB+/-
1m LIBOR+100
Aug-06
Russian Interregional Bank for
Existing
$72.5
Russia
Development
Assets
*Has been included for comparison reasons
Baa2
3m LIBOR+160bps
8
Market Developments in CIS

Rapid expansion in consumer asset pool

Legal, tax and regulatory environment is better understood

ABS transactions are becoming an increasingly popular tool of funding in CIS
and Kazakhstan

Diversified funding source and improve cost of lending

Rating agencies are becoming more familiar with the legal framework,
macroeconomic situation, and the underlying assets to be securitised
9
2 Future development of securitisation in
Russia and Kazakhstan
Main Securitisation Drivers
Balance Sheet
Management


Regulatory Capital
Relief
Match Funding to
Asset

Reduce Gearing

Release Loss
Reserves
Strategic
Economics

Create Publicity

Lower Financing Cost

Capital Markets
Presence

Extension of Tenor

Less Corporate
Covenants

Diversified Funding
Source

Less Price Volatility

No Dilution of
Corporate Funding
11
Challenges for Market Expansion
Major Challenges for Originators

Establishment of clear underwriting standards and collection procedures

Build up of loan portfolios with consistency … and credit quality

Proven track record for specific loan types

Set-up IT systems to accommodate securitisation requirements
Major Market Challenges

Development or refinement of the legal framework to facilitate true sale securitisations:

– Achieving an insolvency remote transfer of assets/loans
– Proper protection of creditors and investors;
– Efficient transfer of underlying securities (e.g. residential mortgage loans)
Clarification or ascertaining of tax positions

– Withholding taxes;
– VAT
– Stamp duties
Regulatory treatment for the portfolio sale

Development of a local SPV infrastructure and issuance of ABS notes in local currencies
12
What does the future bring for CIS …?

Future Flow to continue, especially for
– Countries where sovereign is below investment grade
– New capital market entrants
– To extend funding tenor

True Sale ABS structure for Existing Asset to dominate

New asset classes

Improved understanding of market standards yielding better rating outcomes
and wider investor demand

Despite challenges remaining for RMBS the demand for funding will lead to
steep growth

Local ABS subject to development of local investor community

Greater focus on regulatory capital treatment
13
The Crème de la Crème of Asset Classes in CIS
Consumer assets will continue to grow

Short-term consumer assets that do not require security are easiest from a legal
perspective

In addition these assets often have short tenors and high excess spread

Specifically, consumer loans and auto loans have been and will continue to be positive
Residential mortgages will become increasingly popular and have the highest
potential

In 2006 approximately 80% of European consumer ABS is RMBS

Challenges remain for RMBS
– Lack of efficient long-term FX swap market
– Questions regarding the ability of a foreign SPV enforcing security in an economic stress
scenario
– Rapid appreciation of real estate prices in the CIS
– Relatively small amount of excess spread available to cover losses (4-9% vs. 20-30% for
consumer assets)

Despite these challenges the demand for funding will lead to steep growth in RMBS
from the CIS
14
Funded vs. Synthetic Securitisation
To date all transactions in the CIS have been funded transactions

Funded transactions

Can provide both funding and regulatory capital relief
– Will remain the choice for all but the highest rated issuers as asset securitisation will
continue to provide competitively priced funding
– Can provide ALM management by matching tenor of funding to tenor of assets
Synthetic transactions

May be a good option for the highest rated issuers who would like regulatory
capital relief but have competitive funding alternatives (i.e. Eurobonds,
syndicated loans, local bonds, funding from parent)
– Challenges remain for Synthetic securitisation
– Lack of super senior Credit Default Swap provider
– Lack of clarity on the views of the regulator and accountants
15
The Alchemy of Securitisation: Capital Relief

According to Russian statutory rules capital relief is based on a “legal
approach”

Sale of assets provides de-consolidation of assets and off-balance sheet
treatment of these assets

Russian Regulatory Capital rules:
– Minimum ratio of total capital adequacy N1=10%
– Risk weighting is 100% for corporate loans, auto loans, retail loans
– For securitisation no specific accounting or capital adequacy rules
16
The Alchemy of Securitisation: Capital Relief
Scenario 1
Scenario 2
Portfolio of consumer loans of
USD 100mln
Portfolio of consumer loans of USD 100mln
• Risk weighted assets USD 100mln
• Minimum ratio of Total Capital
adequacy N1 = 10%
• Risk Weighting Assets (RWA) =
USD 100mln
Capital required = USD 10mln
• Portfolio is sold to off-shore SPV
• True sale (no recourse)
• Credit enhancement = USD 10mln of
subordinated loan
• After securitisation RWA of consumer loans
= 0%
• Subordinated loan will result in RWA of USD
10mln consuming the capital of USD 1mln
Capital required = USD 1mln
17
Unveiling Accounting Considerations



The accounting rules in Russia are changing towards IFRS. Basel II will be
partly implemented in Russia in 2008-2009 (Minimum Capital Requirements,
Pillar 1)
Contrary to the CBR statutory rules, IFRS uses a “risk transfer approach” for
the de-recognising of assets
The following key questions should be considered:
– Does the Originator have to consolidate the SPV?
– Can the Originator / Seller de-recognise the assets on sale to the SPV?

For de-recognition of assets the two main criteria should be checked:
– Control
– Risks and Rewards

These rules are introduced by the revised IAS 39 which implements more
stringent rules on consolidation of SPV and new tests for de-recognition
18
3 Case Study
First Kazakhstan RMBS Transaction
First one in Kazakhstan …
20
Securitisation Funding Solution
As is the case with many Originators in the CIS, BTAI had a relatively small but quickly
growing mortgage portfolio

As BTAI’s portfolio was not of sufficient volume to justify a Term Securitisation, ABN
AMRO structured a Warehouse to allow room for further origination


Warehouse funding can be refinanced at any time with no penalty

After a Term Securitisation is closed, the Warehouse will remain in place to fund the
BTAI’s ongoing loan origination
EUR mln
Example for Warehouse funding
140,0
120,0
100,0
80,0
60,0
40,0
20,0
0
Term Securitisation
0
3
6
9
12
15
18
21
Months from close of Warehouse financing
24
21
Warehouse Structure Overview



The loans were sold to First Kazakh Securitisation Company B.V., a newly established
special purpose vehicle (SPV) located in the Netherlands
The SPV is ultimately funded by an ABN AMRO-sponsored multi-seller conduit (rated
A1+ / P1 by S&P and Moody’s, respectively)
The transaction is partially enhanced by political risk insurance provided by Multilateral
Investment Guarantee Agency, a subsidiary of the World Bank
Custodian (Bank
CenterCredit)
Back-up Servicer
(Halyk bank)
Security
Trustee
Calculation and
Paying Agent
Originator / Seller
/ Servicer
(BTA Ipoteka)
[Notification
of Sale]
Borrowers
Mortgage Certificates
True Sale (KZ Law)
First Kazakh
Securitisation
Company BV
Warehouse
facility
ABN AMRO Bank
Conduit
CP
ABCP Investors
Sub-Loan
[Loss-payee
assignment]
Political Risk
Insurer
(MIGA)
Interest Rate
Swaps
Liquidity Facility,
Letter of Credit,
FX Hedging
22
Structural Enhancements & Transaction Benefits
The combination of “structural enhancements” allowed the company to raise
funding at a very attractive cost
Benefits of the transaction




Cost efficiency
– Allowed to raise financing at the
level significantly cheaper than
BTAI’s previous funding
Independency from parental funding
– The transaction allowed to diversify
BTAI funding sources and to achieve
less dependency on Bank
TuranAlem
Increase of the funding amount
– Able to raise an amount of funding 5
times bigger that the largest
international finance of BTAI to date
“Stepping stone” transaction for
entering the term ABS markets
– Generating more data history
– Practice operational procedures
Transaction structural enhancements











All collection proceeds to be daily transferred into
secured offshore bank account
Security over collection accounts
Subordinated loan provided by the Originator
Trustee to monitor accounts
– Accelerated cash flow “waterfall” to apply following
an event of default
– Trustee can take control of accounts in specified
circumstances following an event of default
Back-up Servicer appointment from the start
Parent servicing performance guarantee
Certain portfolio performance triggers in place
Underlying portfolio linked to foreign currency – daily
conversions
Mortgage Certificates held by Custodian
Contingent hedging arrangement
Political Risk Insurance will cover risks of convertibility
and transferability of collections and expropriation of the
collateral
23
Execution – Major Challenges of the Transaction
DOCUMENTATION / LEGAL DUE DILIGENCE STAGE
RATING PROCESS
True Sale Structure





Legal environment
(foreclosure and court
procedures)
Claw back from Originator
Commingling Risk
Fiscal Implications
Regulatory approvals
New jurisdiction


SECURITISATION
TRANSACTION
Time consuming
Internal procedures



Systems adjustments
Changes in day to day
operations
Accounting
Lack of historical data
Unfamiliarity with
concept and
documentation



DUE DILIGENCE STAGE
Extensive due diligence
phase
Rating agencies had to set
up rating methodology for
Kazakhstan
Extensive transaction
documentation
24
Lessons from Kazakhstan and other EMs

In Kazakhstan the following points were confirmed:
– Local and international presence for third parties is key (bank, tax and legal)
– While Mortgage Certificates can offer a clean legal sale, operationally the sale can be
very difficult (endorsements, custodian, etc)
– In the absence of historical data, limited information or even examples can give the
Rating Agencies comfort
– The due diligence phase is more extensive than Originators anticipate
– The feasibility study will never resolve all issues – choose an arranger you trust to
solve structural challenges

Lessons we have learned in other Emerging Markets jurisdictions:
– European investors prefer “simpler” structures
– If there is no data the Rating Agencies will take very conservative views
– Ultimate rating levels are not entirely independent from the Originator’s or country’s
rating
– Investors can be unpredictable, involve the sales force early in structuring phase
25
Execution Challenges for Originator

Extensive transaction documentation in English

In depth due diligence by the Rating Agencies and the arranging bank
– Historical asset performance
– Underwriting criteria
– Servicing standards
– Experience with delinquency and foreclosure

Adjustments in internal systems and procedures
– IT systems
– Accounting procedures and internal instructions
– Reporting requirements for securitisation

Efficient and timely registration of Mortgages Certificates in the regions
26
Axioms for a successful transaction
Use accomplished arranger
and other third parties
Establish generic
funding program




Permits repeat low cost
issuance
Target highest ratings to
obtain widest distribution and
tightest pricing
Securitise core assets

SUCCESSFUL
TRANSACTION

Establish a dedicated
deal team
Develop funding program
around existing practices


Customer franchise unaffected
Less operational risk –
straightforward execution
Main parties to the
transaction need to have local
knowledge and presence as
well as international
experience with structured
finance
Modification of offshore
structures and precedent
Firsthand experience and
solutions for challenging
issues

Ability and authorisation to
make decisions
27
Meet ABN AMRO Team
Gary Watmore, Executive Director, Global Head of Developing Markets Asset Securitisation
Tel: +44 20 7678 6288, Fax: +44 20 7678 3597, E-mail: gary.watmore@uk.abnamro.com
Tim Vieth, Director, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 1949, Fax: +44 (0) 20 7678 3730, E-mail: tim.vieth@uk.abnamro.com
Dan Stadnik, Director, CEEMEA Asset Securitisation
Tel: +44 20 7678 5827, Fax: +44 20 7678 3597, E-mail: dan.stadnik@uk.abnamro.com
Maria Bazhanova, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 4872, Fax: +44 (0) 20 7678 3730, E-mail: maria.bazhanova@uk.abnamro.com
Alex Ivanov, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 2980, Fax: +44 (0) 20 7678 3730, E-mail: alex.ivanov@uk.abnamro.com
Natalia Joubrina, Associate, CEEMEA Asset Securitisation
Tel: +44 (0) 20 7678 6819, Fax: +44 (0) 20 7678 3730, E-mail: natalia.joubrina@uk.abnamro.com
28
4 Panel discussion
Making more possible
30