Toxic in the West, securitised assets to continue growing in CEE

By bne IntelliNews February 26, 2008

Nicholas Watson in Prague -

Central and Southeast Europe have lagged Russia and the rest of the former Soviet Union in asset securitisation. But could 2008, against all the odds, prove to be the first year of significant growth there? Some analysts think it could.

Last year was without doubt a difficult time for the world's securitisation markets as the credit crunch resulting from the collapse of the US sub-prime mortgage market filtered through to other regions. "The lower volumes recorded compared with 2006 provide a clear indication of reduced investors' appetite resulting from the global credit crisis," Tycjan Bielecki, assistant vice president at Moody's Investors Service, said in a recent report.

For example, there were predictions at the start of 2007 that Russia would see $5bn-7bn of securitised assets issued during the year, but in the event there were only eight transactions worth about $1.8bn, comprising four mortgage-backed deals, two diversified payment rights (DPR) deals, the first all-Russian collateralised debt obligation (CDO) and one auto loan securitisation.

Even so, the whole CIS region came out as the top emerging market region for such new issues, with 13 deals worth around $3.6bn. This represented about 46% of total such issuance in emerging markets. The CIS was followed by Turkey with six deals, mostly in DPRs. Central Europe, by contrast, saw only one transaction in 2007, a PLN100m covered bond issuance in Poland. Interestingly, asset-backed securities (ABS) led in terms of issuance volume in emerging markets, while residential mortgage-backed securities (RMBS) lost the dominant position they held in 2006.

Even so, some analysts are optimistic about 2008 for Central and Eastern Europe's securitisation markets. "There are fundamental strengths in the emerging market securitisation markets that should reduce the impact of the sub-prime crisis and ensure a quicker recovery with limited damage," believes Gregory Kabance, managing director for Fitch Ratings.

For one thing, the relative stability in emerging markets last year could increase investors' confidence in securitizations in these new markets. This stability stems from emerging economies being fundamentally well managed, while credit and debt ratios to GDP remain modest despite the recent high growth.

Analysts also point to the large number of deals that were postponed during the second half of 2007 as the credit crunch kicked in from August, meaning there is a healthy pipeline that should, markets permitting, start to materialise over the next two quarters. In addition, there have been legal improvements made to the securitisation markets in many new jurisdictions such as Turkey, Russia, Ukraine and Poland. Finally, of course, there are the relatively attractive yields on emerging market bonds.

"In 2008, we expect continued geographic expansion of securitisation into new jurisdictions and further diversification of asset classes into collateralised debt obligations, auto loans, leases and commercial mortgage-backed securities," says Moody's Bielecki.

Mortgaging the future

Russia is expected to maintain its lead in 2008 among emerging markets, given the sheer number of deals that were postponed from 2007. The country will also see more diversification of asset classes coupled with growing interest from second-tier banks.

One of the key drivers for securitisation in Russia has been the rapid development of the mortgage market - growth that is expected to continue despite the credit crunch. Mortgage lending in Russia has continued to grow at an exponential rate, with the volume of outstanding mortgage loans in Russia at the end of September standing at over $22bn compared with $6.9bn in the year-earlier period.

"Despite concerns that the global liquidity crunch would cause a slowdown in Russian mortgage lending, the third-quarter figures show that the pace of lending in Russia hasn't abated," says Bielecki. "A number of leading Russian mortgage lenders indicated that they will be tightening their underwriting standards, which could lead to a moderation in the pace of mortgage origination for those banks. On the other hand, many new banks are entering the mortgage lending market and, therefore, the overall pace of growth hasn't slowed."

Like the mortgage market, the consumer lending market is also growing rapidly in Russia. The volume of consumer loans (excluding mortgages) nearly tripled to $90bn in the two years to July 2007 as the popularity of credit cards as a popular means of borrowing boomed. "With more and more banks lending to consumers and growing interest in Russian structured bonds from both Western and domestic investors, we can expect to see continued growth in Russian securitisation," Bielecki says.

Central and Southeast Europe has been much slower to develop a market for securitised bonds. One of the main reasons for the delay is that the banking sector in the region has ample liquidity to conduct its business and so doesn't need to find alternative sources of funding. However, there are several factors that should counter-balance the above and make 2008 a better year for the issuance of securitised assets: the improving legal framework for securitisation in several countries; the dominant ownership of Central European banks by Western banking groups well versed in structured finance; and a growing mismatch in assets and liabilities from the rapidly expanding mortgage lending.

Specifically, Slovenia introduced securitisation legislation in 2007 and Croatia's parliament will vote on a series of regulations in 2008. Serbia has intensified its work on the securitisation law by consulting with market players, while the Polish Ministry of Finance has created a dedicated team consisting of government representatives, industry associations and business representatives with the aim of working to improve the current securitisation framework.

The Polish Ministry of Finance's move is not just a sign of how the new government led by Civic Platform is much more reformist than the previous conservative one that was booted out of office in October's elections; the country is set to co-host the 2012 European football championships with Ukraine, which will entail a huge building spree of roads, stadiums and hotels. "Due to the scale of the required infrastructure, transportation and hospitality investments, as well as the tight timeframe, securitisation and project finance may become an attractive funding source," says Bielecki. "According to the Polish deputy prime minister and minister of economy, public-private partnerships may play vital role in financing the infrastructure development for the event."

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