How have changing market conditions affected the growth of the Russian structured finance market?
In Russia, the overall economic recession has led to a decrease in individual's real income. As a result, the demand for different bank credit products has been low and it was even close to zero between the end of 2015 and the beginning of 2016.
Economic and regulatory factors
First of all, the low demand for bank credit products relates to consumer, auto and SME loans credits. These types of assets constitute a basic part of the non-mortgage assets that banks are interested to securitise. Therefore, the volume of accumulated portfolios in some instances is not enough to proceed with economically justified securitisation.
On the other hand, the Russian Central Bank headed for a rehabilitation for the banking sector as many Russian banks have lost their licenses for various reasons such as, violating the banking regulations, running risky operations and committing frauds. The regulator is now closely monitoring the financial sector, including the issuers and investment companies. They immediately penalise those who violate the rules, even for a minor breach of regulations, with high fines. This regulatory approach brings an extra financial burden to all players in the Russian financial market and shows that the Basel III rules - the new requirements for evaluating risks in case the bank acquires junior tranche of notes issued through the SPV - has been implemented. This new approach has affected small banks, which they are now obliged to create additional capital on the balance, and at sometimes it slows down the economics of the structured finance market as the deals have become more expensive.
Due to changes in the respective regulation and possibly in response to the sanctions and downgrade decrease in national ratings by the three main international rating agencies, it was no longer accepted (beyond the limits of grandfathering applied to a limited number of existing securitisation instruments or issues) to use ratings of uncertified rating agencies for Russian regulatory purposes. This rule came into force on 1 July 2017 and currently none of the international rating agencies have passed the certification of the Central Bank. At the same time, the leading national rating agency – Analytical Credit Rating Agency (ACRA) - has published a structured finance rating methodology and announced that it is fully prepared to assign ratings for any kind of local structured finance deals based on the developed system of the national scale ratings. Having an ACRA's rating is now a requirement for the inclusion of securities into the Lombard list of Russian Central Bank.
New state-supported programme
The Russian government agency, Agency for Housing and Mortgage Lending (AHML), has also launched a new programme called 'AHML Mortgage Factory', with aims to propel the securitise mortgage portfolios and issue mortgage-backed securities (MBS) managed by the AHML. In this programme, the bonds are planned to be single-tranche and they are not rated as investors' interests are ensured by a state guarantee provided by AHML.
Due to these changing market conditions, a number of players in the structured finance market have held up the launch of their securitisation deals and subsequently the Special Purpose Vehicles (SPVs) will liquidated. But at the same time, we believe the appeared certainty on the national ratings and the shaping approach of the Basel III 1250% risk retention rule can give an impulse to the market and increase the interest not only to classic off-balance securitisation deals, but also to more complicated structured products.
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