GLOBAL
REPORT
Ruble, Hryvnia and Tenge —
Dirty Words for ABS?
O
ver the last several months, Russia and other countries of the
Commonwealth of Independent
States have engaged in protracted battles
to manage the depreciation of their currencies. Some have been more successful
than others, but all have fewer resources
to keep the fight going than they did only
late last year.
This has upped the ante for a cluster
of structured, existing-asset deals from
Russia, Kazakhstan and Ukraine, primar-
FEATURE
ily backed by mortgages and auto loans.
With collateral in dollars and borrowers’
income most often in local currency, an
appreciating dollar is making payments
harder for borrowers to honor.
This has more people talking about
the prospect — however dim — of authorities re-denominating foreign currency loans into local currency. This is a
way for a government to curry favor with
cash-strapped borrowers facing foreign
currency debt, but it carries a high toll
for creditors who could receive far less
in foreign currency terms than they’d
agreed to initially with the borrower. By
extension, the impact on structured deals
with dollar collateral could be brutal.
“Re-denomination in the CIS is a
very low risk, [but] we shouldn’t ignore
it,” said Christophe de Noaillat, senior
vice president at Moody’s Investors Service. “Even if the risk is a one percent
probability, it can impact a transaction,
especially the highest rated tranches.”
Moody’s published a report last
month that provided different re-denom-
ination scenarios. As a hypothetical, the
agency used a basic ABS structure where
Class A shares have a 20% enhancement
from a subordinated tranche and an ‘A2’
rating when there is no re-denomination risk. In such a case, creditworthiness
erodes when you introduce re-denomination risk and falls fast when you dial
up that risk even by small gradations. For
instance, with an only 1% probability of
re-denomination in the first six months
of the deal, a long-term probability of
likewise 1%, and a loss on assets incurred
by re-denomination of 50%, the rating
on Class A would drop to ‘Baa3’. Bump
up the probability of re-denomination
in the first six months to 5% and hold
everything else constant, and the rating
would notch dramatically down to ‘Ba2’.
While the scenario is an extreme one,
the loss assumption isn’t so farfetched.
Russia’s ruble has slipped about 30% since
mid summer, while Ukraine’s hryvnia has
shed more than 50% of its value. Kazakh-
18 Asset Securitization Report // March 2009
stan, meanwhile, after holding firm during months of onslaught, gave in on Feb. 4
and cut the tenge’s value by 18%.
Analysts see chances of more depreciation ahead, as the pressure is still
on. Ukraine in particular is feeling the
heat, as the country has been teetering
on the brink of default since about November. “Downward pressure on the exchange rate is most intense in Ukraine,
given they are very close to the net international reserves imposed by the IMF
program,” said Frank Gill, director of
European sovereign ratings at Standard
& Poor’s. “Moreover, there has been a
steady decline in local currency deposits
levels... as retail depositors convert local
currency deposits into foreign currency.”
Since November, the country has had
an agreement with the IMF to receive
$16.4 billion in funds.
Dwindling Ammunition
The other two CIS countries with
GLOBAL
REPORT
structured deals are better positioned.
“Russia and Kazakhstan have a lot
more ammunition than Ukraine,” said
Tim Ash, head of CEEMEA research at
Royal Bank of Scotland. But even that
ammunition has dwindled fast. In the
case of Russia, foreign reserves totalled
$382 billion as of Feb. 20, down about
a third since peaking in August. And
pumping dollars into the market, combined with jacking interest rates up, has
managed only to stave off selling and
not smother it.
In the case of Russia, one view is that
the government won’t be as gung-ho
about keeping depreciation within certain limits, having given corporations
with heavy dollar debt the opportunity
to swap into rubles. “[Russia could argue]: we managed the FX; we let anyone
who wanted to close FX positions over
the past three months do it,” Ash said.
More recently, the Bank of Russia has
focused on hiking interest rates in a bid
to defend the currency.
Should these currencies plumb further depths, the chatter over re-denomination will likely pick up, even if the
prospects remain remote. For some, they
are “nil.”
“Government authorities can’t influence both corporate and private individuals’ decision into which currency they
prefer to take a loan,” said Levan Zolotarev, senior vice president at Russian
Standard Bank (RSB).
At any rate, RSB doesn’t have to
entertain any kind of re-denomination
talk, as its loan portfolio is entirely in
Russian rubles.
“We never planned to issue loans to
our customers in foreign currency,” he
added, saying that RSB drew a lesson
from recent crises in Turkey and South
Korea, where banks passed on foreign
exchange risk to their borrowers but had
to ultimately deal with the mismatch
problem themselves.
Borrowers in Russia with foreign
currency debt have had opportunities to
swap into rubles, said Irina Penkina, associate director at S&P. VTB 24, for instance, has had a program in place since
December. “This isn’t driven by political
concerns,” Penkina said. “It’s purely commercial.” But it’s unclear whether many
people have chosen to swap out of their
dollar debt, even though their payments
in ruble terms have risen dizzyingly over
the last several months. “The re-denomination usually comprises significant fees,
and the rates are much higher,” Penkina
said. “It depends on how people think
about the devaluation of the ruble compared to the dollar.”
eral but borrowers earning income in local currency. In the CIS, S&P doesn’t rate
any transaction where the denomination
of collateral and salary of the borrower
doesn’t match up. But this isn’t due to a
blanket policy.
“It’s not that we’ve made a decision
not to rate dollar-denominated ABS in
the CIS,” said Zeynep Adalan, head of the
EEMEA structured finance group at S&P.
“These are more difficult to hedge. Even if
the borrower earns an income in dollars,
at any point their company might decide
not to pay them in dollars.”
In a report in December, Fitch said
that it had stopped giving any credit to
“The re-denomination usually comprises significant
fees, and the rates are much higher. It depends on
how people think about the devaluation of the ruble
compared to the dollar.”
In Russia, about 20% of mortgages
are denominated in currencies other
than the ruble, with the share higher in
Moscow and St. Petersburg. Consumer
loans are almost all in rubles.
While precise stats for other CIS
countries are hard to come by, the denomination of deposits gives an indication of how strongly their consumers
lean on foreign currencies. Before the
crisis intensified in mid last year, foreign currency deposits as a share of total deposits in the banking system were
about one-third in both Kazakhstan and
Ukraine. And the crisis has only pushed
more people to keep their money away
from tenge or hryvnia.
Fitch Ratings and Moody’s rate a
number of deals from Russia, Kazakhstan and Ukraine that have dollar collat-
securitizations in the CIS where the
borrowers reported foreign currency
income, such as in Red & Black Prime
Russia MBS and Ukraine Mortgage Loan
Finance.
Mega-Devaluation
Vs. Re-denomination
While potentially catastrophic, the
damage wrought by a re-denomination
isn’t necessarily worse than that of a
mega-devaluation. The case of Argentina,
the only country to have re-denominated
en mass, provides an illustration. In 2002,
the government converted dollar obligations into pesos at 1 to 1.4. At that point,
the currency had crashed to around
3.86 to the dollar from a previous parity,
translating into a devaluation approaching 300%, although the peso would later
www.StructuredFinanceNews.com // March 2009 19
GLOBAL
REPORT
hover closer to 3.3 to the dollar.
As a result, the re-denomination led
to losses on the underlying collateral of
up to 75% in some cases. But it didn’t automatically trigger defaults.
A number of the transactions that
technically defaulted were deals with onshore trusts, in which the government redenominated not only the collateral but
also the ABS bonds themselves. Investors
balked at the modified terms and conditions, leading to defaults. “But we can’t
say for sure what would have happened
in these cases had investors accepted the
changes,” said Juan de Mollein, head of
the Latin America structured finance
group at S&P.
MBS under a program originated by
Banco Hipotecario Nacional serve as an
example. Investors rejected the terms of
the re-denominated paper and also filed
lawsuits. Payments on interest and principal halted in 2004, with the trustee accumulating collections into an escrow account ever since. “Up to the last payment
in 2004, our calculation was that investors
had lost 36% in interest payments and 32%
in principal payments,” de Mollein said.
But what investors would be getting
today had they accepted the terms and let
the deal run its course is difficult to say.
And while the lost payments of over
30% up to 2004 look appalling, they
wouldn’t have necessarily remained that
way for the life of the transaction. In the
nadir of Argentina’s 2002—2003 crisis,
delinquencies above 90 days peaked at
25% but fell to 5% within a few years.
Also, another Argentine transaction,
a securitization of oil and gas royalties originated by the province of Salta,
shows that the damage inflicted by re-denomination isn’t irreparable.
And here the domicile of the trust
issuing the notes appears to matter, de
Mollein said.
Initially $234 million with an 11.5%
coupon, Salta’s transaction floated in
2001. Because the issuing trust was offshore, the government couldn’t re-denominate the bonds, which remained
in dollars. In addition, investors didn’t
formally challenge the re-denomination
of the underlying, onshore assets. Still,
the deal withered, as not only were all of
the underlying royalties re-denominated
into pesos but the government froze the
royalty charge for three years. To add
insult to injury, energy exploration in
Salta all but halted. The transaction was
downgraded by both S&P and Moody’s
as its collateral base dwindled and failed
to make principal payments. But in the
past few years, it has fully caught up with
the principal payments.
CIS Assets Hang Steady
For existing asset deals from the CIS,
depreciating currencies have yet to dent
performance. One reason for this is that,
in most cases, property values, local currencies or both appreciated sharply after
the collateral was originated. “Since in
Kazakhstan and Russia we had a boom-
ing property market in 2007, for portfolios originated in 2005—2006, we disregarded the peak,” said Jaime Sanz, head
of emerging market structured finance at
Fitch. “The LTVs were already a lot lower
than we thought, so there was a lot of
buffer there.”
But, he added, the question remains:
“What if there’s another 30% depreciation in these currencies?”
For existing asset transactions in the
CIS, there has been negative downgrade
action from all the agencies over the past
several months. But the cause has been
sovereign and counterparty downgrades,
and not asset deterioration. All the same,
in some cases the downgrades have already pushed notes to sub-investmentgrade ratings, with acute damage incurred by mortgage and auto loan deals
from Ukraine thanks to the declining
fortunes of the sovereign.
Whether the region’s currencies keep
getting hit or not, the deal landscape
looks grim. But one arguably beneficial
impact that the crisis could eventually
have is to boost the domestic market, at
least in Russia, and give originators more
opportunities for tapping investors interested in a ruble portfolio.
“Russia has a very poor domestic investor base, and it will not emerge overnight,” said RSB’s Zolotarev. “[But] going
forward I see restrictions from regulators
to borrow abroad and an acceleration of
regulatory measures to motivate Russian
investors to invest domestically.” — FO
DON’T BE PUZZLED BY THE MUNICIPAL MARKET.
THE BOND BUYER ■ THE BOND BUYER ONLINE ■ THE BOND BUYER ARCHIVE
Subscribe Today Call: 800-982-0633
20 Asset Securitization Report // March 2009