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Vladimir Dragunov, Partner
Baker and McKenzie, Moscow
12-13 October 2006London
RECENT DEVELOPMENTS IN SECURITISATION IN
RUSSIA
Securitisation in Russia and the CIS
©2006 Baker & McKenzie 2
CONTENTS Our Practice and Experience Key Drives for Securitisation in the CIS What can be Securitised in Russia and the CIS Our experience in Russia and the CIS Structuring and Executing the Deal:
Preliminary stage Structuring stage Execution stage
Sample Structures Asset Class Specific Issues
©2006 Baker & McKenzie 3
Our Russian Practice The first to open offices in Russia (1989)
The largest international law firm in Russia
Approximately 75 lawyers in the Moscow Office
Functions as an integrated CIS office and practice
Broad banking and finance practice. English law capabilities in the Moscow Office
Dedicated Russian and Global teams of lawyers (London, Frankfurt, New-York, etc.). Philosophy: in-depth local knowledge coupled with international experience
Highly Recommended for Russian Securitisation and Structured Finance work (Legal 500, Chambers Global)
©2006 Baker & McKenzie 4
Our Experience in RussiaOur Experience in Russia and the CISand the CIS
Advising on early structured finance projects since 1999. Focus on securitisation throughout the CIS since 2001 and extensive global experience
Advising the International Finance Corporation (IFC) and the Russian State Duma on developing the regulatory framework for securitisation of assets in Russia (Position Paper issued in 2004)
©2006 Baker & McKenzie 5
Our Russian and CIS Structured Finance DealsOur Russian and CIS Structured Finance Deals
US$350 millionDiversified Payment Rights Securitisation
Counsel to the Arrangers
March 2006
US$450 millionLeasing Receivables
Securitisation
Counsel to the Originators
March 2006
EUR250 millionWarehouse Facility
Residential Mortgages Securitisation
Transaction Counsel
February 2006
BTA IpotekaRed Arrow Alfa Bank
EUR300 millionConsumer Receivables
Securitisation
Counsel to the Arrangers
April 2005
Russian Standard Bank
EUR300 millionConsumer Receivables
Securitisation
Transaction Counsel
December 2005
US$200 millionDiversified Payment Rights Securitisation
Counsel to Monoline Financial Guarantor
December 2005
Home Credit & Finance Bank
Kazkommertsbank
EUR250 millionWarehouse Facility
Consumer Receivables Securitisation
Counsel to the Arranger
November 2005
Russian Standard Bank
Technical Working Group on Securitisation
Russian Legal Framework for Securitisation
Working Group Member
March 2005
International Finance Corporation
US$200 millionDiversified Payment Rights Securitisation
Counsel to Monoline Financial Guarantor
June 2006
Kazkommertsbank
US$90 millionResidential Mortgages
Securitisation
Transaction Counsel
July 2006
Vneshtorgbank
©2006 Baker & McKenzie 6
Key Drives for Securitisation in the CIS Balance-Sheet Clean-up
- Reduction of the Mandatory Reserves on Assets - Improving Financial Ratios (e.g., borrowing limits)- Disposal of Low Liquidity Assets
Access to Cheaper Financing- Lower Interest Rates/Discounts- Higher Credit Ratings for the Transaction
Diversification of Sources of Funding
Profile Raising
Creation of Long-Term Financing Program
©2006 Baker & McKenzie 7
Asset Classes for Securitisation in the CIS Loan Portfolios (mortgage loans, car loans, consumer loans,
corporate loans, less likely: defaulted loans)
Debit and Credit Card Receivables
Diversified Payment Rights (МТ100/103+ S.W.I.F.T messages)
Export Receivables
Domestic Bonds, Bond Portfolios
Lease Payments
Other
©2006 Baker & McKenzie 8
General Legal Framework in Russia
Russian Civil Code:
Part 1 (General): assignment, security, general contract issues
Part 2 (Special): factoring, bank accounts, loans and credits, sale and purchase
Part 3 (Conflict of Laws): default scenarios in the absence of choice of law, special rules on assignment
Mortgage Backed Securities Law
Banking Law
New Currency Control Law
General Insolvency and Bank Insolvency Laws
Russian Tax Code
Other
©2006 Baker & McKenzie 9
IFC Working Group on SecuritisationIFC Working Group on Securitisation True Sale issues (identification, future receivables, claw-back)
Bankruptcy remoteness of Russian companies
Credit enhancement issues (lock-box accounts, pledge of accounts)
Securities legislation (funding instruments, collateral)
Tax issues (VAT on sale, future flow transactions)
Currency control issues (special accounts, reserve requirements)
PROPOSED SOLUTION: structured and prioritized approach
©2006 Baker & McKenzie 10
Challenge Factor (Fitch)• In each jurisdiction the CF takes into account:
– The rule of law– Control of Corruption– Regulatory quality
• Emerging market jurisdictions are then rated on a scale of CF 1- 4:– CF1: no rating cap (Argentina, Brazil, Mexico)– CF2: a rating cap of 8 notches (Poland, Turkey) – CF3: a rating cap of 5 notches (Russia, Kazakhstan,
Ukraine)– CF4: capped at IDR (Nigeria)
©2006 Baker & McKenzie 11
Challenge Factor (Fitch)
• No limitiations on CF2 and CF3 jurisdictions where:
– Robust securitisation legislation is in place
– Sound history of securitisation transactions
– Strong true sale opinion
– Involvement of EBRD and IFC
©2006 Baker & McKenzie 12
Key Project Stages
1. Preliminary Stage
2. Structuring Stage
3. Project Execution
©2006 Baker & McKenzie 13
Preliminary StageGOALS:
1. Early identification and mitigation of potential obstacles to securitisation (e.g., documentation, wording of anti-disposal, assignment clauses, etc.);
2. Preparing quality standard documentation for the originator (standard loan and security documents).
©2006 Baker & McKenzie 14
Preliminary Stage (2)STAGE CONTENTS:
Conducting due diligence and preparing recommendations for theimprovement of:
1. Standard agreements of the Originator (e.g., loan, mortgage, bank account agreements, lease agreements, export agreements, financial lease agreements, services agreements, etc.); and
2. Agreements documenting the Originator’s indebtedness (e.g., syndicated loan facilities, Eurobond documentation, domestic bonds offerings, etc.)
©2006 Baker & McKenzie 15
Preliminary Stage (3)Certain Russian law issues to be addressed in the documentation:
1. Interest/Commissions/Acceleration/Prepayment
2. Assignments and Transfers
3. Set-off
4. Confidentiality Clauses
5. Negative Pledge Clause
6. Applicable law and dispute resolution
7. Other
Note: wording of clauses may be crucial!
©2006 Baker & McKenzie 16
Structuring StageSome issues to be addressed at this stage:
On balance-sheet or off-balance sheet securitisation, setting up an SPV
Domestic or cross-border securitisation
Structure: single, conduit, revolver (master trust)
Funding source: bonds, short-term commercial papers, participation certificates, other
Potential investors: residents, non-residents (Rule 144-А, Regulation S)
Listing: domestic, foreign, double, or both? Private placement?
Other
©2006 Baker & McKenzie 17
Structuring Issues in Russia. Between the Lines
Russia is a rather strong pro-debtor jurisdiction. Courts tend to protect the weaker party (e.g., security, netting, assignments)
Increasing importance of court practice and court interpretation (assignments, factoring, security, etc.)
Many foreign law documents and concepts may not work in Russia. Need specific tailoring, careful documentation and wording in the Transaction Documents!
Unawareness of Russian courts and regulators of complex finance transaction, including securitisations
©2006 Baker & McKenzie 18
Structuring: True Sale Securitisation
SPV
True SaleTrust Management
Russia
Foreign Jurisdiction
Major Financial Institution
Credit Enhancement
Securities
Sale
POOL OF ASSETS
ORIGINATOR
Special Account
©2006 Baker & McKenzie 19
Structuring: Domestic Securitisation
SPV 1 SPV 2
RUB
POOL OF ASSETS
Originator
RUB RUB RUB
INVESTORS
COLLATERAL
BONDS
Repayment of the loan / Receivables
LOAN
TRUE
SALE
RUB.
RUB RUB
RUSSIAMINIMUM
CAPITALIZATION RULES
Agent
©2006 Baker & McKenzie 20
Structuring: Certain General Issues Existing Assets v. Future Flow
Bank Secrecy and Data Protection
Setting up and Operating the SPV
Regulatory Approvals
Tax Issues
Currency Control Restrictions
Asset Class Specific Issues
©2006 Baker & McKenzie 21
Securitisation of Credit/Debit Card Receivables
BANK(Originator)
SPVAssignment
Special
account
A
B
$40 mln., 2007
$50 mln., 2011
$120 mln., 2030C
Reimbursement
V I S A
MASTERCARD
$
$
Special
account
Payments without netting
Offshore Russia
Payments without netting
Insurance policy
Offshore
©2006 Baker & McKenzie 22
Securitisation of Diversified Payment Rights
Payor Bank
Beneficiary
Payor
Concentration Account
Original nostro account
CollateralAccount
New nostroaccount
Investors
SPV
Issue of securities
Payment Order
Russia
Export contract
МТ103+
BANK(Originator)
Sale of DPRs
Crediting the Beneficiary’s account
$
$ $
$
$
$
$Offshore
©2006 Baker & McKenzie 23
Use of Factoring in Securitisation Factoring License
A factor should be a “bank, other credit organization or a company holding a factoring license” (Article 825, Russian Civil Code)
BUT: Other legislative provisions
Court practice
Recent trends
Transaction structure
Possible consequences
Russian Licensed Bank
Foreign Licensed Bank
Foreign Factoring Company
Foreign Company
Russian Company
RISKTYPES OF FACTORS
©2006 Baker & McKenzie 24
Execution Stage 1. Advising on the structure of the transaction. Due diligence on
Originator and its documentation to identify and resolve potential bottlenecks
2. Drafting and advising on the Transaction Documents (Sale Agreement, Servicing Agreements, Offering Documentation, Credit Enhancement Documentation, etc.)
3. Providing general legal support, participating in meetings, negotiating documentation
4. Providing legal opinions on the transaction (true sale, corporate approvals, validity and enforceability of agreements, etc.)
5. Closing
Vladimir Dragunov, Partner
Baker and McKenzie, Moscow
12-13 October 2006 London
RECENT DEVELOPMENTS IN SECURITISATION IN
RUSSIA
Securitisation in Russia and the CIS