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Russian mortgage bond breaks new ground

In late May, Russia’s state-owned Agency for Housing Mortgage Lending opened the local mortgage-backed securities market with a deal that aims to lay the foundations for domestic issuance. AHML, the government agency established in the mid-1990s to refinance mortgages, has been a driving force in the development of Russia’s MBS law. This first public deal is seen as a test of this law, which should drive the development of Russia’s burgeoning mortgage market.

Liquid real estate issue 03

There have been Russian MBS transactions before but these have been cross-border transactions issued in dollars. AHML, which is politically motivated to develop a local MBS market, hopes its debut deal will encourage others to issue locally.

"A lot of originators have big portfolios and the benefit of the Russian MBS market is that transactions will be cheaper than offshore deals," says Natalia Koltsova, director, structured finance, at AHML in Moscow. "In addition, European and US investors can buy Russian securities and we are seeing a lot of demand for rouble-denominated assets."

AHML’s Rb3.3 billion ($130 million) deal, lead managed by Citi, was publicly auctioned on the Moscow International Currency Exchange, the Russian securities exchange. It came in three tranches. The Rb2.9 billion A3-rated piece, which priced at 6.94%, was publicly auctioned and a Rb264 million Ba1-rated tranche was taken down by the European Bank for Reconstruction and Development. That piece was priced at 9.5%. AHML retained the Rb130.794 million unrated tranche.

Legal issues figured high as challenges in putting the AHML deal together. To start with, Russia’s MBS law was untested and fairly grey.

"In some areas the law isn’t detailed enough and in others it was too prescriptive and quite restrictive on the structure," says David Ziegler, a London-based director in asset-backed securities at Citi.

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