Yaron Ernst
SVP - Head of Business Development
Structured Finance Group yaron.ernst@moodys.com

Agenda
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
Overview: Russian Securitisations
Moody’s Rating Methodology
Issues in New Markets
Outlook for Russian market
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Russian/CIS Growth
Volume of CIS Securitisation by Year
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Russia
2003*
* Excludes Gazprom's $1.25B future flow deal
Kazakhstan
2004 2005 2006
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RMBS
12%
Other
4%
Future Flow
22%
Consumer
Loans
27%
Lease
Receivables
35%
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Growth of Housing Loans
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Moody’s Global Rating Scale
Quality of credit
Gilt edged
Very high
Upper-medium
Medium grade
Questionable
Poor quality
Very poor long term
Ba1
Ba2
Ba3
B1
B2
B3
Aaa
Aa1
Aa2
Aa3
A1
A3
Baa1
Baa2
Baa3
Caa2
Caa3
Ca
C short term
Prime-1
Prime-2
Prime-3
Not Prime
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Moody’s Rating – Expected Loss


Ratings measure credit risk:

Probability of a default

Severity of a loss
Expected loss = Probability of default x Severity

Example:
– Prob. Def. = 5%
– Severity of Loss = 20% (recovery rate = 80%)
– EL = 5% x 20% = 1%
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Moody’s Idealised Expected Loss Table
R a ting
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa
1 2 3 4
Y e a r
5 6 7 8 9 10
0.00003% 0.00011% 0.00039% 0.00099% 0.00160% 0.00220% 0.00286% 0.00363% 0.00451% 0.00550%
0.00031% 0.00165% 0.00550% 0.01155% 0.01705% 0.02310% 0.02970% 0.03685% 0.04510% 0.05500%
0.00075% 0.00440% 0.01430% 0.02585% 0.03740% 0.04895% 0.06105% 0.07425% 0.09020% 0.11000%
0.00166% 0.01045% 0.03245% 0.05555% 0.07810% 0.10065% 0.12485% 0.14960% 0.17985% 0.22000%
0.00320% 0.02035% 0.06435% 0.10395% 0.14355% 0.18150% 0.22330% 0.26400% 0.31515% 0.38500%
0.00598% 0.03850% 0.12210% 0.18975% 0.25685% 0.32065% 0.39050% 0.45595% 0.54010% 0.66000%
0.02137% 0.08250% 0.19800% 0.29700% 0.40150% 0.50050% 0.61050% 0.71500% 0.83600% 0.99000%
0.04950% 0.15400% 0.30800% 0.45650% 0.60500% 0.75350% 0.91850% 1.08350% 1.24850% 1.43000%
0.09350% 0.25850% 0.45650% 0.66000% 0.86900% 1.08350% 1.32550% 1.56750% 1.78200% 1.98000%
0.23100% 0.57750% 0.94050% 1.30900% 1.67750% 2.03500% 2.38150% 2.73350% 3.06350% 3.35500%
0.47850% 1.11100% 1.72150% 2.31000% 2.90400% 3.43750% 3.88300% 4.33950% 4.77950% 5.17000%
0.85800% 1.90850% 2.84900% 3.74000% 4.62550% 5.37350% 5.88500% 6.41300% 6.95750% 7.42500%
1.54550% 3.03050% 4.32850% 5.38450% 6.52300% 7.41950% 8.04100% 8.64050% 9.1905% 9.7130%
2.57400% 4.60900% 6.36900% 7.61750% 8.86600% 9.8395% 10.5215% 11.1265% 11.6820% 12.2100%
3.93800% 6.41850% 8.55250% 9.9715% 11.3905% 12.4575% 13.2055% 13.8325% 14.4210% 14.9600%
6.39100% 9.13550% 11.5665% 13.2220% 14.8775% 16.0600% 17.0500% 17.9190% 18.5790% 19.1950%
14.3000% 17.8750% 21.4500% 24.1340% 26.8125% 28.6000% 30.3875% 32.1750% 33.9625% 35.7500%
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Expected Loss Curve
10%
8%
6%
Expected Loss
4%
Standard Deviation
2% Aaa expected loss over WAL
0%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Cum. loss rate
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Rating Process: Qualitative and Quantitative
Q ua lit at ive
•Origination sources
•Underwriting quality
•Management level
•General risk factors
•Economic trends
•Deal Structure
•Parties involved
•Legal/ tax issues
•Discussion of all factors
•Checking models’
•reasonableness
•sensitivity
•Benchmarking vs.
•Final vote similar deals
Loan/Pool
Analysis
Deal and
Securities’
Structure Analysis
Rating
Committee
Q ua nt ita tive
•Loan-by-loan analysis
•Pool characteristics
•Statistical and quantitative modeling
•Pool cash flows
•Default frequency and
•Models review
•Tranching and timing, loss severity
•Payment priorities enhancement
•Spread analysis
•Performance/ cash triggers
•Tranching/ credit enhancement
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Mortgage Backed Securities (RMBS) - 1
RMBS Asset analysis

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Moody’s Individual Loan Analysis – “MILAN”
Is a Scoring Model,
– Each single loan compared to a benchmark loan
– Adjustments for deviations from benchmark
– The total portfolio to a benchmark portfolio
Result of in depth analysis and comparison of major
European RMBS markets
Standardised, but addresses country specific features
Able to analyse multi-seller/country pools
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Mortgage Backed Securities (RMBS) - 2
RMBS Asset Analysis
Definition
Benchmark
Loan
(Step 1)
Default
Frequency
Loss
Severity
Benchmark Benchmark
Loan
(Step 2)
Loan
(Step 3)
Benchmark
CE
(Step 4)
Adjustments: single loan
& portfolio
MILAN
Aaa CE
(Step 11)
Total
Aaa CE
(Step 12)
Final
Aaa CE
(Step 13)
Qualitative and quantitative CE adjustments
CE adjustment due to replenishment, tranching, etc.
MILAN Inputs and Outputs are subject to
Rating Committee Decision
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Mortgage Backed Securities (RMBS) - 3
“MILAN” Adjustments – Why?


Captures additional default, loss and volatility drivers
(deviation from benchmark and “no data“)
– For each single property
– Account for certain loan aspects
– Based on borrower characteristics
– Addressing seasoning and performance aspects
– For originator/servicer quality
– Diversification issues of the portfolio
Adjusting for structural aspects
– Revolving portfolio – future asset profile
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Asset Backed Securities (ABS) - 1
Asset Analysis: Distribution Parameters



Mean & Standard Deviation
Based on historical originator data
– Static/dynamic
– Sub-Pools
– Consistency
– Extrapolation of short data series
Conservative view on Standard Deviation
– Stress for Recession scenario
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Asset Backed Securities (ABS) - 2
Asset Analysis: Static Performance Data
Cumulative Losses
Months after origination up to 12 up to 24 up to 36 up to 48 up to 60 up to 72
1996 1.40% 2.50% 3.20% 3.50% 3.70% 4.00%
1997
1998
1999
2000
2001
0.80%
1.10%
0.90%
0.70%
1.00%
1.80%
1.90%
1.90%
2.10%
2.30%
2.60%
2.50%
2.60%
2.90%
2.70%
Historical Cumulative Losses
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
1996
1997
1998
1999
2000
2001 up to 12 up to 24 up to 36 up to 48 up to 60 up to 72
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Asset Backed Securities (ABS) - 3
Asset Analysis: Extrapolated Performance Data
Months after origination
1996
1997
1998
1999
2000
2001
Average
Standard Deviation
Extrapolated Cumulative Losses up to 12
1.40%
0.80%
1.10%
0.90%
0.70%
1.00% up to 24
2.50%
1.80%
1.90%
1.90%
2.10%
2.30% up to 36
3.20%
2.30%
2.60%
2.50%
2.80%
3.00% up to 48
3.50%
2.60%
2.90%
2.80%
3.10%
3.40% up to 60
3.70%
2.70%
3.00%
2.90%
3.20%
3.50% up to 72
4.00%
3.00%
3.30%
3.20%
3.50%
3.80%
3.40%
0.38%
Extrapolated Cumulative Losses
5%
4%
3%
2%
1%
0%
1996
1997
1998
1999
2000
2001 up to 12 up to 24 up to 36 up to 48 up to 60 up to 72
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Asset Backed Securities (ABS) - 4
Asset Analysis: Adjustments to Distribution Parameters
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Possible for both parameters
– Trends impact Mean
– Uncertainty impacts Standard Deviation
Pool dependent
– Composition (asset criteria, limits)
– Age of assets (“Seasoning“)
Originator/Servicer dependent
– Performance trend
– Change of credit policy (underwriting, servicing)
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Asset Backed Securities (ABS) - 5
The Model: Links Assets and Liabilities
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Standard model (“ABS ROM“) – technical frame
– Models deal specific features
Reflection of cash flow structure (“Waterfall“)
Beside distribution, other inputs:
– Timing of defaults/losses
– Recovery rates and time of recovery
– Amortisation profile, transaction expenses
– Triggers (variety possible, specific impact )
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Issues to Watch: Securitisations In New markets
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Legal and regulatory environment
Organisation of financial sector
Interest and currency exchange rate risk
Sovereign rating
Systemic risks - Local Currency Guidelines (LCG)
Objectives of issuers and investors
Extent of government support

Importance of Legal Environment

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Bankruptcy laws – true sale, claw back, commingling, set-off
Security interest and claim priorities
Enforceability
For future flow deals – isolation of cashflows abroad
Consumer protection laws/policy
– notification to borrowers
– data disclosure
– usury
Tax issues: corporate, transfer, withholding or other
Specific securitisation law
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Two Main Elements That Could Reduce the Rating


Systemic risks
– Include financial stability, legal, regulatory, quality of data, risk of fraud
– Affect ALL debt issued in the country, whether LC or FX
Transferability and Convertibility risk
– Address the potential impossibility of paying FX to offshore investors in the event of moratorium coupled with FX restrictions by the government
– Affect only FX debt
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Risk Layers and Rating Scales
Political risk
Systemic risks
Structure
Assets
Origination
Serivicng
History
Currency swap
IR swap
Liquidity
Back-up servicing
-------------
LC-
National
Scale
(NSR)
Legal
Enforcement
Fraud risk
Transferability
Convertibility
Expropriation
--------------------
FX-
Global Scale
Payment systems
Quality of data/IT
Overall stability
------------
LC-
Global Scale
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Piercing the Sovereign “Ceiling” – How?
Aaa
A rating can exceed the LCG only by an external guarantee or insurance “wrap”
Country’s local currency Guidelines
(LCG)
A1 for Russia Sovereign ceiling may be pierced based on: (1) highly rated local currency obligation combined with (2) liquidity facility or political risk insurance
Credit
Enhancement: subordination, reserve, excess spread
M
I
C
S
Y
S
T
E
Assets
Credit
Quality
R
I
S
K
S
L
E
G
A
L
R
I
S
K
S
Country’s foreign currency ceiling
A2 for Russia
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Sovereign Ceilings and Local Currency Guidelines
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Russia – Outlook for Securitisations
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Tremendous growth of consumer and mortgage lending will continue to generate future MBS/ABS
Improvements of laws/regulations to facilitate securitisations should relieve existing uncertainties
Deal flow is expected to expand to other asset classes
– CDOs, leases, SMEs, infra-structure
Local securitisations are expected shortly (MBS)
Multi originators structures
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Ten Commandments – Preparation For a Transaction
1.
2.
Discuss legal issues EARLY with lawyers & rating agency
Decide (and discuss with us) rating target
3.
4.
Evaluate what enhancement/structure may be needed
Prepare portfolio data, including data format
5.
6.
Organise historical performance data
Consider back-up servicer
7.
8.
Determine structure
Assess external support (PRI, wrap, guarantee)
9.
Plan deal timetable reasonably
10.
Prepare strategy for future transactions
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MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
Contact: yaron.ernst@moodys.com
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