A diversified payment rights securitisation for ZAO Raiffeisenbank re-opened this important source of funding in Russia for the first time since the financial crisis, but joint lead manager WestLB will not be around to manage follow-up deals.

WestLB, once Germany’s third largest landesbank, passed into history at the beginning of July, dismembered into three pieces on the instructions of the EU. So the issue of an inaugural $175m via ZAO Raiffeisenbank’s new diversified payment rights (DPR) funding programme was a landmark in more ways than one. As well as being the first DPR-backed transaction out of Russia since the financial crisis began, it was also WestLB’s swansong deal.

The securitisation of financial future flows, or DPR, first emerged in the late 1980s as a form of secured funding for, typically, emerging market entities. The investors benefit from offshore security in the shape of hard currency payments into the borrower’s correspondent bank account in Europe or the US, thus avoiding transfer and convertibility risk. Since the hard currency is not coming out of the emerging market but is already trapped offshore, DPR transactions also largely mitigate the risk of sovereign interference. The result is that the deals can often be rated anywhere from one to four notches higher than the originator’s own rating, and higher than the sovereign itself. This allows cheaper finance and longer tenors than might otherwise be possible.

The financial crisis knocked the stuffing out of the market, not least because the monoline insurers had taken to wrapping many of these deals (which would typically have been rated BBB) to AAA. Since the premium charged by the monolines was less than the spread differential between issuing at BBB level and issuing at AAA, this was an attractive play for the originators. The disappearance or downgrading of the monolines and the disappearance of the structured investment vehicles that invested in the product has forced the market back to first – and unwrapped – principles.

“A key challenge has been to re-establish the investor base,” says Dr Stefan Bund, WestLB head of asset-backed finance for western Europe (excluding Germany) and global emerging markets.

Restarting the market

Though the wrapped deals were downgraded along with the monolines, the underlying transactions have proved resilient and continued to perform. Only one DPR deal has ever defaulted – a $75m transaction from Colombia’s Avianca Airlines – and that was because of a legal flaw. The market has been slowly coming back to life, however, with WestLB playing a key role as global market leader from 2008 to 2011. Since 2008, it says, there has been some $10.8bn of financial future flow issuance out of Turkey, Brazil, Peru, Guatemala, Nigeria – and now Russia.

Two Russian banks had issued under DPR programmes prior to the crisis – Alfa Bank, which issued on three separate occasions in 2006 and 2007 in both dollars and euros, and MDM Bank, which transacted in 2006 and again in 2007.

Raiffeisen recognised the strength of [a DPR programme], and the benefits of having it up and running in good times so that it could continue to access the market in bad times

Dr Stefan Bund

“These Russian deals were not wrapped, and placed mostly in the US after extensive roadshows,” says Andrey Merezhko, a director in the WestLB asset-backed finance team.

Raiffeisen Bank International (RBI) and its Russian subsidiary, ZAO Raiffeisenbank, began discussions with WestLB more than a year ago, to explore the possibilities of setting up a DPR programme for the Russian bank. “Raiffeisen recognised the strength of such a funding tool, and the benefits of having it up and running in good times so that it could continue to access the market in bad times,” Mr Bund explains.

ZAO Raiffeisenbank, which is Russia’s seventh largest bank by Tier 1 capital and the core of RBI’s business in eastern Europe, saw the opportunity for longer-term funding at lower yields. By securitising its own foreign currency receivables base, it could also reduce the funding it received from its Austrian parent.

Multilateral appetite

In parallel, WestLB also began sounding out likely investors. Top of the list were multilateral agencies such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD).

“Multilaterals are interested in investing in future flows because they recognise that this can provide the same benefits to the emerging market borrower as direct lending, but with a better risk-return ratio,” says Mr Merezhko.

WestLB was awarded a formal mandate jointly with RBI's own team towards the end of 2011 and began putting together one of the most robust structures seen in the market to date. While the security includes export payment flows, recognised as very stable, it excluded bank-to-bank flows such as treasury and interbank payments, seen as less stable. “And the debt service coverage ratio triggers were the highest seen so far,” adds Zhomart Tleuzhanov, a manager in WestLB’s asset-backed finance team.

The vehicle established to issue notes under the DPR programme is called Roof Russia, in reference to Raiffeisen’s roof-shaped logo. The inaugural notes were assigned a rating of A- by Fitch, against ZAO Raiffeisenbank’s BBB+ rating for foreign currency and Russia’s sovereign BBB.

Multilaterals are interested in investing in forward flows because they recognise that this can provide the same benefits to the emerging market borrower as direct lending, but with a better risk-return ratio

Andrey Merezhko

The rating took into account the nature of the collateral, noting that the DPRs were mainly related to oil and gas exports and other commodity flows. It noted the high debt service coverage levels (about 200 times) and the small programme size relative to liabilities. The agency assigned the Russian bank a going concern assessment rating of GC3. Mr Bund notes that the DPR structure will only work for strategically important issuers.

“This product is not suitable for every emerging market entity, but only for the biggest and strongest,” Mr Bund notes. “[In the case of ZAO Raiffeisenbank] the likelihood that it will lose its customers is relatively low, and the likelihood that the regulator will shut it down is low, because it is so important for the economy.”

The target investors were multilaterals who had bought DPR deals before and so knew the structure, as well as commercial investors, and the original aim was to raise between $200m and $225m. In the end, $175m-worth of notes were placed with three investors – the IFC, the EBRD and WestLB itself. The multilaterals lent for seven years and WestLB for five. “We have other investors lined up in the queue for subsequent issuance later this year,” says Mr Bund.

Pricing prize

With the notes being placed privately, the pricing has not been made public. However, pricing benchmarks included the sovereign price and the price of the bank’s own unsecured debt. It is worth noting that in the past DPR pricing has been anywhere from 50 to 125 basis points below where the originator’s unsecured debt is trading.

“The pricing was helped by the structure and by Raiffeisen’s name, and was quite an achievement for Russia at the moment,” says Mr Merezhko.

The last of the three tranches – one per investor – was closed on the final working day of June, making this quite literally WestLB’s ultimate deal. As a legal entity, its name has now changed to Portigon. While Portigon retains WestLB’s banking licences and ‘good’ assets such as the Roof Russia investment for the time being, it plans eventually to become a pure portfolio service management company.

Portigon, now wholly owned by the regional government of North Rhine-Westphalia, already has two clients – the other two parts of the former WestLB. One is Erste Abwicklunganstalt (EAA), the bad bank that keeps the non-performing assets. The other is Verbundbank, WestLB’s savings banks business, which is to be acquired by Helaba – another landesbank. Portigon has set up a strategic partnership with IT firm Hewlett-Packard, and the two are pitching for the bad bank business of another bailed-out lender, Hypo Real Estate. If successful, Portigon believes this would give it a viable business for the future.

The asset-backed finance team will not be doing any more deals for WestLB, which is a pity, as they believe the Roof Russia structure provides a template for future Russian transactions. "There is interest in this product from all the top 10 Russian banks," says Mr Bund. So it would not be a complete surprise if the team migrated its talents elsewhere in the not too distant future.

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