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Zenit issues first local-currency Russian CDO

Bank Zenit issued the first collateralized debt obligation backed by a portfolio of Russian corporate debt last month. The Red Square transaction is a two-year synthetic CDO, denominated in roubles with 40 local credits. It is one of a handful of emerging market CDO transactions, and what makes it significant is that the underlying portfolio consists of local-currency debt.

The portfolio, worth R6.7 billion ($250 million), was divided into three tranches: equity, mezzanine and a senior tranche, with the latter making up 80%. The deal was sold to investors across Europe and Asia. The Russian market, in terms of local-currency debt, is still widely considered to be under-exploited and so a potential area for structured credit to develop.

The transaction is also indicative of the development of structured credit throughout the emerging markets. Liquidity and local market depths are improving almost across the board. Bank Zenit, which is a top-20 Russian bank, worked as portfolio adviser on this deal, and JPMorgan structured the transaction.

Russia’s local corporate debt market is growing particularly rapidly. Market capitalization has reached R785 billion and there have been 311 issuers. As spreads tighten in the external debt market, so generous yields from Russian deals are likely to prove attractive to investors looking to diversify their portfolios.

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