Page 102 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
In 2003, veksels accounted for just under half of all the outstanding corporate debt instruments on the domestic market, while corporate bonds made up only 16% of the total. By the end of 2006, the share held by veksels had fallen to nearly nothing while corporate bonds made up 45% of the total outstanding bonds.
Despite the decline in the use of the veksel they remain popular with smaller and regional companies. As these notes are unregulated they are simple and cheap to issue. Also, as veksels have been in use since Soviet times, managers are very familiar with their use and the market in- frastructure to support them is well developed. Issuing corporate bonds, by comparison, is expensive and bureaucratic but carries less risk.
There is still a market in veksels, which tend to carry higher yields because of the risks involved and can be very profitable. The Denholm Hall Group estimates that there was US$15bn worth of veksels outstanding as of the end of 2006. This is a niche market but it made the notes one of Russia's top performing investment vehicles in 2005. As veksels are all traded over the counter in rubles they offer investors exposure to fast growing small and medium-sized enterprises that is hard to get otherwise.
Asset-backed securities and mortgages
Owning a comfortable apartment is close to most Russians' hearts after the nightmare of finding accommodation in Soviet Russia, and most Russians are still living in their Soviet-allocated apartments that were gifted to the population in the 1990s as part of the first round of privatisa- tion. IMS, a leading Russian market research company, estimates that over two-thirds of Russians are unhappy with their current housing and want to move.
Table 4.4: Current Russian ABS issues (US$m)
Date of issue Amount issued, (US$m) Maturity Securitisation
Source: Troika Dialog
Mortgage lending first appeared around 2001, but really only took off in about 2003. The average length of a mortgage credit is 15–25 years and interest rates were about 11% at the start of 2007. According to a survey by the Russian business magazine Profil at the end of 2006, the average mortgage is repaid in five years, so 8–10% of the banks' total mortgage portfolio is redeemed early every year.
The introduction of the laws to underpin asset-backed securities (ABS) will cause the biggest change in the domestic capital market in the next few years as it opens up the mortgage business.
ABS volumes grew from US$1.8m at end-2005 to US$3.9bn at end-November 2006 (including the Gazprom 20, which is not a classic securitisation) and ABS comprised 7% of the total non- government Eurobond market as of the end of 2006. Of the US$2.1bn worth of ABS issue in 2006, US$1.6bn was issued by banks. However, the single biggest issue was made by Russian Railways via an SPV named Red Arrow (the name of the express train that runs from Moscow to St Petersburg, see also text box below) which issued RUB13.73bn (US$526m) of ruble-denominated ABS, backed by the lease receivables of the Russian Railways. This was the first public securitisa- tion of lease payments in Russia, and arguably the most interesting deal on the Russian ABS market in 2006. Details of current ABS issues can be seen in Table 4.4.
Gazprom 20 Rosbank 09
Soyuz Bank 10 HCFB 12
Russian Standard 12 Alfa Bank 11
Red Arrow 12
VTB 34
City Morgage Bank 33 MDM Bank 13
23/07/04 02/02/05 27/07/05 09/12/05 27/03/06 28/03/06 30/03/06 05/07/06 10/08/06 17/10/06
1,250 01/02/20 300 24/09/09 50 10/08/10 150 10/05/12 380 12/01/12 350 15/03/11 507 30/06/12 88 18/05/34 73 15/09/33 430 23/10/13
Gas supply contracts
Card payment claims Auto loans
Consumer loans Consumer loans Diversified payment rights Lease receivables Mortgage loans Mortgage loans
Auto loans
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