Russia’s ABS market received a big boost last month following MDM Bank’s $430 million securitization of auto loans. The deal set many benchmarks, not least the highest-rated securitization of rouble-denominated consumer loans. It was also the first true-sale securitization out of Russia to be issued in both 144a and Reg S formats.
But what makes it a pioneering deal is its innovative swap technology. The underlying portfolio of auto loans is denominated in roubles and carries a fixed interest rate. The bonds, issued via a special purpose vehicle backed by the loans, are denominated in dollars with a floating rate of interest. To mitigate the currency and interest rate risks related to the transaction, the lead managers, Merrill Lynch and Dresdner Kleinwort, used a balance guaranteed swap.
“It really is a unique swap mechanism that’s allowed us to take out the rouble market risk for investors,” says Alex von Sponeck, head of CEEMEA debt capital markets at Merrill Lynch. “Until now no swap counterparty had been willing to take rouble pre-payment risk.”
What makes the swap mechanism even more important is that the loans are pooled together in a static portfolio – no new loans can be added. “Therefore,” says von Sponeck, “if everybody prepaid their loans tomorrow the deal would pay off tomorrow. So investors don’t know the amortization profile of the loans, which makes it difficult to know what the swap profile would be.”
The swap also enabled the senior tranche to receive the highest rating for any rouble-denominated securitization. The $270.9 million tranche was rated Baa1/ A–. The $77.4 million B tranche was rated Baa2/ BBB, while the $54.8 million C tranche received ratings of Ba2/ BB. All three tranches were oversubscribed. Thirty-four investors participated in the transaction, including dedicated ABS and emerging markets funds. One investor was the European Bank for Reconstruction and Development, which took a chunk of the C tranche, although the multilateral was criticized in some quarters for not sufficiently scaling back its participation once it became clear that private sector demand was strong. The EBRD’s mandate is to encourage the private sector, not hinder its acceptance of eastern European risk.
The EBRD, however, says that it cut its investment by half once it realized the scale of private sector demand.
The MDM deal’s influence on the market was immediate as HVB and JPMorgan delayed Russian Standard Bank’s auto loans securitization to take into account the balance guaranteed swap.
As the fastest-growing part of the consumer lending sector, it’s not surprising that Russian banks are seeking to securitize their auto loan portfolios. “It’s the logical starting point for any institution in Russia to open their securitization platform,” says Fraser Malcolm, head of ABS syndicate and trading at Dresdner Kleinwort.