MDM’s auto loan securitisation issue, the largest ever out of Russia, was comfortably oversubscribed and more issues are in the offing, reinforcing the trend in the CIS region. Edward Russell-Walling reports.

This has been an exceptional year for emerging market securitisations, one in which Commonwealth of Independent States (CIS) issuers have begun to dominate a sector previously led by Turkey. MDM Bank’s recent $430m auto loan securitisation issue, the largest from Russia so far, has reinforced that trend.

Privately-owned MDM is now one of the 10 largest Russian banks and has been rated by Standard & Poor’s as the country’s most transparent. Michel Perhirin, a Société Générale veteran who started ZAO Raiffeisen Austria in Moscow, became CEO of MDM earlier this year.

Although MDM began as a corporate institution, it has recently been focusing heavily on the retail market. As the Russian economy improves, fuelled by development of its energy resources, more Russians are borrowing to buy cars and other goods. In the past four years, on the back of that phenomenon, MDM has built a rapidly growing auto loan book worth more than $700m, the second largest in Russia after Rosbank. New assets are being added at a rate of $50m to $60m a month, the bank says.

First securitisation

The bank had last been seen in the international capital markets in July with its first subordinated issue, a $200m five-year bullet. Even as it was closing that deal, it was working on its first securitisation with Merrill Lynch, which has devised a number of pioneering Russian structured deals, and Dresdner Kleinwort.

“Securitisation is, of course, a funding exercise, but it’s also a means of investor diversification,” explains Timur Kibatullin, who heads MDM’s capital markets team. “The investor audience for asset-backed securities is quite different from general senior debt investors. Securitisation gives us a number of means we haven’t used yet, leading to capital relief, for example, and as our assets become more liquid, in between bigger deals we can finance through conduit deals, bridge facilities and warehousing.”

Static underlying pool

The underlying loans (about 34,000 of them) were structured as a static rather than a revolving pool. This made the offering more conservative, because investors knew what loans they were getting. Risk was mitigated further by a balance guaranteed swap.

This helped the senior tranche achieve a rating of Baa1/A-, the highest rating yet for a securitisation backed by rouble-denominated assets. The transaction was split into $270.9m of top-rated A notes, $77.4m of B notes and $55.8m of C notes, with a $26.9m subordinated loan.

Ultimately increased from its original size of $400m, the $430m offering was well-received for a number of good reasons. While the deal offered many asset-backed investors their first exposure to Russia, for emerging market funds it provided asset diversification. The size of the transaction implied decent liquidity in the secondary market, and the three tranches offered investors a range of risk.

After an 18-day roadshow, the issue was comfortably oversubscribed and priced at or inside initial price guidance. The C notes were five times oversubscribed, according to one of the bankers involved.

There will be more securitisations to come from MDM. Unlike many other jurisdictions, the Russian mortgage market has not evolved enough to provide meaningful assets for securitisation. However, as this magazine went to press, Merrill Lynch and Dresdner Kleinwort were already pre-marketing a diversified payment rights transaction for MDM, said to be worth $300m.

SME drive begins

The bank is also looking closely at the securitisation of some of its loans to small and medium-sized enterprises (SMEs). The SME sector is one of MDM’s more recent target markets. It has hired a team from KMB Bank, which specialises in the small business market, to spearhead its drive and its SME assets have been developing “quite quickly”, according to Mr Kibatullin.

“We’re looking at a small [SME securitisation] deal in the second half of next year, and a bigger deal in 2008,” he says. “It depends on market conditions and the generation of new assets, but we are already taking steps to prepare for it.”

MDM itself is a logical candidate for an initial public offering (IPO) or a target for takeover. When it appointed a number of new independent directors earlier this year, gossips said it was preparing itself for sale to a foreign bank, perhaps HSBC.

Only joint owners Andrei Melnichenko and Sergei Popov know for sure, and they are not telling. Mr Kibatullin says he does not think that anything major is scheduled for the next couple of years. All he will say is that if an IPO was planned, it would probably be preceded by the issue of Tier 1 and Tier 2 debt. “It would make sense to maximise the value of our capital,” he says.

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