Speed Bump Hit by ABS Won’t Kill Market for VTB: Russia Credit

Russian legislation passed last year is paving the way for the development of the asset-backed securities market even as a dearth of cash from pension funds slows growth in notes tied to mortgages, VTB Capital said.

The sale of bonds backed by mortgages may jump 28 percent this year to 165 billion rubles ($4.8 billion), down from 56 percent growth in 2013, according to Andrey Suchkov, the head of securitization at VTB, the nation’s biggest organizer of such debt. Similar deals in Brazil were valued at 45.4 billion reals ($19 billion) in December, according to a monthly report from Brazil’s capital markets association.

A bill passed in December allowing for the sale of securities linked to credit cards, auto loans and loans to small- and medium-sized businesses may help develop the market even as 580 billion rubles of pension-fund money is directed away from investment this year. The market has momentum and deals will become more commonplace at lenders, which can use the debt as collateral at the central bank, Suchkov said.

“We are counting on growth,” Suchkov said in a Jan. 28 interview in Moscow. “Banks need money and people understand securitizations now. They are becoming an accepted tool.”

VTB Capital helped organize 12 out of 19 mortgage-backed deals on the domestic market last year, Suchkov said. The state-run Agency for Housing Mortgage Lending and Vnesheconombank, Russia’s development bank, were the main investors. “But there were purely market deals, too” with non-state pension funds and asset managers, he said.

Club Deals

Yields on Absolut Bank’s November 2040 ruble-denominated mortgage bonds issued last year in a market deal, have held flat this year at 9.5 percent.

“Asset-backed securities are interesting,” Dmitriy Gritskevich, a money manager at OAO Promsvyazbank in Moscow, said by e-mail yesterday. “But mainly for long-term investors. Their secondary market is very illiquid.”

The legislation expanding the types of loans that can be securitized is spurring VTB to start work on its first local non-mortgage deals as soon as this year, Suchkov said. Since the 2008 financial collapse, asset-backed sales have been to foreign investors and organized as pre-placed club deals or private placements, he said.

“It’s a new product for our market,” Konstantin Artemov, who manages $500 million of fixed-income funds at Raiffeisen Capital in Moscow, said by e-mail. “We still don’t understand how it will work in practice on the Russian market.”

Yield Search

VTB completed its first post-crisis international deal in 2012, selling $375 million of bonds backed by ZAO VTB24 auto loans to a private investor. This year it plans to complete another cross-border asset-backed sale for VTB24, Suchkov said.

The local market faces headwinds as Russia bars non-state pension funds and Vnesheconombank from getting new contributions this year.

The decision is a “very negative event for us” and Vnesheconombank has announced it’s wrapping up investment programs for mortgage-backed securities, Suchkov said.

VTB Capital’s parent, VTB Group, is rated Baa2 at Moody’s Investors Service, the second-lowest investment-grade category and one level below the sovereign. The yield on the government’s April 2020 dollar bonds fell three basis points to 3.74 percent as of 12:22 p.m. in Moscow today. The extra yield investors demand to hold the nation’s dollar bonds over Treasuries declined four basis points to 229, JPMorgan Chase & Co. indexes show.

Affordable Housing

As the government pushes for affordable housing for the population, the total volume of mortgage loans outstanding jumped almost eightfold in the last seven years to 2.6 trillion rubles, according to Bank Rossii data. Mortgages are equivalent to about 4 percent of gross domestic product in Russia compared with about 80 percent in Europe, showing the market has scope to grow, Suchkov said.

VTB’s forecast is “still positive” for asset-backed securities, Suchkov said. “There’s momentum and the process will continue.”

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