Challenges and Prospects of the Securitisation Market in Russia
An Interview with Sergei Kaduk, DCM Director, Sberbank CIS
29 July, 2014 by Anita Arthur (a.arthur @ c5-online.com), Divisional Manager, Emerging Markets, C5 Communications
– Sergei, you’ve worked in the Russian securitisation market for a longtime and have an impressive track record of good deals. How do you assess the current state of the market and its prospects for 2015?
Sergei Kaduk: Securitisation in Russia will certainly grow. This is due to three factors: 1) the development of the Russian legal framework and the recent enactment of the ABS Law; 2) the needs of originators to attract liquidity and unload their balance sheets; 3) the development of the investor base, primarily non-state pension funds. Recent market developments slowed down participation of private pension funds in placements – however, we expect 2015 to be a real turning point. Another important factor is the reliability of senior tranches and relative lack of good quality issuers in the Russian market. – The new ABS Law opens up new possibilities for securitising SME loans. What challenges stand in the way of turning this opportunity into a reality? What are the “difficulties” faced by originators? Sergei Kaduk: Difficulties that we see are typical for any type of asset securitisation: the lack of data in IT systems; the wide-spread practice of selective application of underwriting criteria; the lack of retrospective information on a loan portfolio. Often, once the portfolio is cleaned up of all “substandard” loans, the remaining amount does not allow the organization of a cost-effective deal. For banks issuing loans to SMEs, the transformation of MSP Bank to something analogous to AHML (for mortgage issuance) would be a huge help. If MSP Bank will be guaranteed to repurchase a large share of senior tranches, that would greatly support originators. – Any practical tips to new originators? Sergei Kaduk: First, invite a few external legal consultants to help you to develop or adjust your existing contractual basis with the goal of securitisation. Second, use all available control mechanisms to make sure that all your employees follow commonly adopted rules and standards. You can engage IT-systems that allow for centralised audit and ongoing monitoring of existing loans. If your IT capabilities are limited, use the practice of unannounced inspections. Checks must be followed by a mandatory feedback to bank employees. Results of such tests should be widely used to improve bank standards and regulations; employee “best practice” training; punishing negligence and rewarding best performing employees. – How do you assess the prospects for infrastructure securitization in Russia? Sergei Kaduk: Prospects for infrastructure securitization in Russia are limited, simply due to a very small number of projects where the securitisation would be relevant. The reasons for this are as follows: 1) Most of the infrastructure companies are investment rated, so it is easier for them to borrow directly; 2) Many medium-sized infrastructure projects cannot afford to securitise for economic reasons: the high cost of even a small issuance; 3) The third factor is the complexity of contractual structures in project financing, under which the allocation of collateral or servicing handover when the borrower defaults have high risks. This does not, of course, mean that we are not interested to develop this business. We often look at the various projects that have the potential for securitisation, but try to be extremely realistic in assessing the potential for placement. Sponsor, covering issuance costs, must understand the source of reimbursement. However, such source is not always obvious. In the same way, the potential investor base and the rate are not obvious too. For infrastructure securitisation these questions are far more acute than for classical securitisations. For pilot infrastructure securitisations the Government can potentially support either through the mechanism of state guarantees, or by channeling public funds in this type of projects. It is important to understand that in 99% of cases such guarantees will not result in losses to the state as the project is structured in such way that the risk of default is the same as the one for investment graded securities. Such Government warranties can help investors to obtain approvals from their credit committees. Subsequent releases will be easier, due to history and benchmarks. – In your opinion, how will the situation change after the reduction of the government support after this year? Sergei Kaduk: Throughout 2014, the level of government support virtually halved: The State Pension Fund of Russian Federation pulled out of the bond market leaving just AHML (for the mortgage backed securities market). The gap in the market will hopefully be filled by non-state pension funds. The markets have recently been heavily influenced by external political factors, thus making it extremely difficult to calculate the pure impact of the government support reduction. We expect that the Central Bank will finally fulfill its promise of introducing longer term REPOs. So far, there hasn’t been any real action since the statement issued by Xenia Yudayeva in April 2014. The regulator’s decisiveness on this matter would provide a significant support to the market. For investors it is crucial to have REPOs on securities. – What, in your opinion, should be done to attract institutional and private investors (both Russian and foreign) to the Russian market? Sergei Kaduk: There is no need to do anything in terms of changing procedures etc. Investors now have every opportunity for entering the markets, regardless of nationality. Investors are qualified enough to understand the product. Both the disclosure level and quality of information are high. To bring the securitisation market in Russia to its current state of development took six years. The market will continue to develop further provided there is a clear direction of the country’s economic policies. –What are you currently busy with? What the main objectives do you set for yourself and for your team? Sergei Kaduk: A few deals based on mortgages and non-mortgages (SME loans, auto). Being able to structure deals in a cost-effective and competent manner whilst minimizing costs, is the main skill of a good arranger. This is the main objective we set when organizing an issuance. *Sergei Kaduk will be speaking at C5’s conference on Securitisation in Russia. For more details about the conference please contact Karina Kusova at [email protected]