Securitisation in Russia and the CIS
RECENT DEVELOPMENTS
IN SECURITISATION IN
RUSSIA
Vladimir Dragunov, Partner
Baker and McKenzie, Moscow
12-13 October 2006
London
CONTENTS
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
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Our Practice and Experience
Key Drives for Securitisation in the CIS
What can be Securitised in Russia and the CIS
Our experience in Russia and the CIS
Structuring and Executing the Deal:
 Preliminary stage
 Structuring stage
 Execution stage
 Sample Structures
 Asset Class Specific Issues
©2006 Baker & McKenzie
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Our Russian Practice
 The first to open offices in Russia (1989)
 The largest international law firm in Russia
 Approximately 75 lawyers in the Moscow Office
 Functions as an integrated CIS office and practice
 Broad banking and finance practice. English law capabilities in
the Moscow Office
 Dedicated Russian and Global teams of lawyers (London,
Frankfurt, New-York, etc.). Philosophy: in-depth local
knowledge coupled with international experience
 Highly Recommended for Russian Securitisation and Structured
Finance work (Legal 500, Chambers Global)
©2006 Baker & McKenzie
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Our Experience in Russia and the CIS
 Advising on early structured finance projects since 1999.
Focus on securitisation throughout the CIS since 2001 and
extensive global experience
 Advising the International Finance Corporation (IFC) and the
Russian State Duma on developing the regulatory framework
for securitisation of assets in Russia (Position Paper issued in
2004)
©2006 Baker & McKenzie
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Our Russian and CIS Structured Finance Deals
International
Finance Corporation
Technical Working Group on
Securitisation
Russian Standard
Bank
Home Credit &
Finance Bank
Kazkommertsbank
EUR250 million
EUR300 million
US$200 million
Russian Legal Framework
for Securitisation
Warehouse Facility
Consumer Receivables
Securitisation
Consumer Receivables
Securitisation
Diversified Payment
Rights Securitisation
Working Group Member
Counsel to the Arranger
Transaction Counsel
Counsel to Monoline Financial
Guarantor
March 2005
November 2005
December 2005
December 2005
Alfa Bank
Kazkommertsbank
BTA Ipoteka
Red Arrow
US$200 million
Russian Standard
Bank
EUR300 million
Consumer Receivables
Securitisation
Counsel to the Arrangers
April 2005
Vneshtorgbank
EUR250 million
US$450 million
US$350 million
Warehouse Facility
Residential Mortgages
Securitisation
Leasing Receivables
Securitisation
Diversified Payment
Rights Securitisation
Diversified Payment
Rights Securitisation
Transaction Counsel
Counsel to the Originators
Counsel to the Arrangers
Counsel to Monoline
Financial Guarantor
Transaction Counsel
February 2006
March 2006
March 2006
June 2006
July 2006
US$90 million
Residential Mortgages
Securitisation
©2006 Baker & McKenzie
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Key Drives for Securitisation in the CIS
 Balance-Sheet Clean-up
- Reduction of the Mandatory Reserves on Assets
- Improving Financial Ratios (e.g., borrowing limits)
- Disposal of Low Liquidity Assets
 Access to Cheaper Financing
- Lower Interest Rates/Discounts
- Higher Credit Ratings for the Transaction
 Diversification of Sources of Funding
 Profile Raising
 Creation of Long-Term Financing Program
©2006 Baker & McKenzie
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Asset Classes for Securitisation in the CIS
 Loan Portfolios (mortgage loans, car loans, consumer loans,
corporate loans, less likely: defaulted loans)
 Debit and Credit Card Receivables
 Diversified Payment Rights (МТ100/103+ S.W.I.F.T messages)
 Export Receivables
 Domestic Bonds, Bond Portfolios
 Lease Payments
 Other
©2006 Baker & McKenzie
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General Legal Framework in Russia
 Russian Civil Code:
 Part 1 (General): assignment, security, general contract issues
 Part 2 (Special): factoring, bank accounts, loans and credits, sale and purchase
 Part 3 (Conflict of Laws): default scenarios in the absence of choice of law,
special rules on assignment
 Mortgage Backed Securities Law
 Banking Law
 New Currency Control Law
 General Insolvency and Bank Insolvency Laws
 Russian Tax Code
 Other
©2006 Baker & McKenzie
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IFC Working Group on Securitisation
 True Sale issues (identification, future receivables, claw-back)
 Bankruptcy remoteness of Russian companies
 Credit enhancement issues (lock-box accounts, pledge of
accounts)
 Securities legislation (funding instruments, collateral)
 Tax issues (VAT on sale, future flow transactions)
 Currency control issues (special accounts, reserve requirements)
PROPOSED SOLUTION: structured and prioritized approach
©2006 Baker & McKenzie
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Challenge Factor (Fitch)
• In each jurisdiction the CF takes into account:
– The rule of law
– Control of Corruption
– Regulatory quality
• Emerging market jurisdictions are then rated
on a scale of CF 1- 4:
– CF1: no rating cap (Argentina, Brazil, Mexico)
– CF2: a rating cap of 8 notches (Poland, Turkey)
– CF3: a rating cap of 5 notches (Russia,
Kazakhstan, Ukraine)
– CF4: capped at IDR (Nigeria)
©2006 Baker & McKenzie
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Challenge Factor (Fitch)
• No limitiations on CF2 and CF3
jurisdictions where:
– Robust securitisation legislation is in place
– Sound history of securitisation transactions
– Strong true sale opinion
– Involvement of EBRD and IFC
©2006 Baker & McKenzie
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Key Project Stages
1. Preliminary Stage
2. Structuring Stage
3. Project Execution
©2006 Baker & McKenzie
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Preliminary Stage
GOALS:
1. Early identification and mitigation of potential
obstacles
to
securitisation
(e.g.,
documentation, wording of anti-disposal,
assignment clauses, etc.);
2. Preparing quality standard documentation for
the originator (standard loan and security
documents).
©2006 Baker & McKenzie
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Preliminary Stage (2)
STAGE CONTENTS:
Conducting due diligence and preparing recommendations for the
improvement of:
1. Standard agreements of the Originator (e.g., loan, mortgage,
bank account agreements, lease agreements, export agreements,
financial lease agreements, services agreements, etc.); and
2. Agreements documenting the Originator’s indebtedness (e.g.,
syndicated loan facilities, Eurobond documentation, domestic
bonds offerings, etc.)
©2006 Baker & McKenzie
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Preliminary Stage (3)
Certain Russian law issues to be addressed in the documentation:
1. Interest/Commissions/Acceleration/Prepayment
2. Assignments and Transfers
3. Set-off
4. Confidentiality Clauses
5. Negative Pledge Clause
6. Applicable law and dispute resolution
7. Other
Note: wording of clauses may be crucial!
©2006 Baker & McKenzie
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Structuring Stage
Some issues to be addressed at this stage:

On balance-sheet or off-balance sheet securitisation, setting up
an SPV

Domestic or cross-border securitisation

Structure: single, conduit, revolver (master trust)

Funding source: bonds, short-term commercial papers,
participation certificates, other

Potential investors: residents, non-residents (Rule 144-А,
Regulation S)

Listing: domestic, foreign, double, or both? Private
placement?

Other
©2006 Baker & McKenzie
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Structuring Issues in Russia. Between the Lines
 Russia is a rather strong pro-debtor jurisdiction. Courts tend to
protect the weaker party (e.g., security, netting, assignments)
 Increasing importance of court practice and court interpretation
(assignments, factoring, security, etc.)
 Many foreign law documents and concepts may not work in
Russia. Need specific tailoring, careful documentation and
wording in the Transaction Documents!
 Unawareness of Russian courts and regulators of complex
finance transaction, including securitisations
©2006 Baker & McKenzie
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Structuring: True Sale Securitisation
POOL OF ASSETS
Russia
Special Account
ORIGINATOR
Trust Management
True Sale
SPV
Sale
Foreign Jurisdiction
Credit
Enhancement
Major
Financial
Institution
Securities
©2006 Baker & McKenzie
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Structuring: Domestic Securitisation
Repayment of the loan / Receivables
TRUE
SALE
Originator
SPV 1
SPV 2
LOAN
RUB.
COLLATERAL
BONDS
RUB
RUB
Agent
RUB
POOL OF ASSETS
RUSSIA
RUB
RUB
RUB
INVESTORS
MINIMUM
CAPITALIZATION
RULES
©2006 Baker & McKenzie
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Structuring: Certain General Issues
 Existing Assets v. Future Flow
 Bank Secrecy and Data Protection
 Setting up and Operating the SPV
 Regulatory Approvals
 Tax Issues
 Currency Control Restrictions
 Asset Class Specific Issues
©2006 Baker & McKenzie
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Securitisation of Credit/Debit Card Receivables
VISA
Payments without netting
Special
account
$
Reimbursement
$
BANK
(Originator)
MASTERCARD
SPV
A
$40 mln., 2007
B
$50 mln., 2011
C
$120 mln., 2030
Assignment
Special
account
Payments without netting
Insurance policy
Offshore
Russia
Offshore
©2006 Baker & McKenzie
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Securitisation of Diversified Payment Rights
Payment Order
Payor
Investors
$
Payor Bank
Issue of
securities
Original nostro account
$
Offshore
$
Concentration
Account
Export contract
$
МТ103+
$
New nostro
account
Collateral
Account
SPV
$
BANK
(Originator)
Sale of DPRs
Russia
$
Crediting the Beneficiary’s account
Beneficiary
©2006 Baker & McKenzie
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Use of Factoring in Securitisation
Factoring License
 A factor should be a “bank,
other credit organization or a
company holding a factoring
license” (Article 825, Russian
Civil Code)
 BUT:
TYPES OF FACTORS
RISK
Russian Licensed Bank
Foreign Licensed Bank
Foreign Factoring Company
 Other legislative provisions
 Court practice
 Recent trends
Foreign Company
 Transaction structure
 Possible consequences
Russian Company
©2006 Baker & McKenzie
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Execution Stage
1.
Advising on the structure of the transaction. Due diligence on
Originator and its documentation to identify and resolve
potential bottlenecks
2.
Drafting and advising on the Transaction Documents (Sale
Agreement, Servicing Agreements, Offering Documentation,
Credit Enhancement Documentation, etc.)
3.
Providing general legal support, participating in meetings,
negotiating documentation
4.
Providing legal opinions on the transaction (true sale,
corporate approvals, validity and enforceability of agreements,
etc.)
5.
Closing
©2006 Baker & McKenzie
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Securitisation in Russia and the CIS
RECENT DEVELOPMENTS
IN SECURITISATION IN
RUSSIA
Vladimir Dragunov, Partner
Baker and McKenzie, Moscow
12-13 October 2006
London