Bloomberg News

Russian Mortgage Bond Deal Is First Rated by S&P (Update1)

December 01, 2006

A planned $222 million publicly placed securitization of Russian home loans became the first such issue to be rated by Standard & Poor's, a sign of growing interest in Russia's fledgling mortgage-backed bond market.

Investors can choose from three types of bond issues backed by residential Russian mortgage loans aggregated by Sovfintrade Ltd., S&P said in a statement released today. Sovfintrade is 99 percent owned by Gazprombank and other companies linked to OAO Gazprom (GSPBEX), Russia's state-run natural-gas pipeline monopoly.

The sale, which S&P expects to close this month, involves 143 million euros ($190 million) of bonds with preliminary investment-grade ratings of BBB+ by S&P and A3 by Moody's Investors Service. About 864 million rubble ($32 million) of bonds are also available with ratings of BB or B by S&P, and Baa3 or Ba3 by Moody's. The Baa3 rating is investment grade.

The involvement of S&P, the world's largest credit-rating company by revenue, comes amid changes to Russian laws in 2003 that allowed for the securitization of home loans. President Vladimir Putin this year is subsidizing the home loan market with an additional 14.8 billion rubles as the nation seeks to bring 10 million citizens into the mortgage system by 2010.

About $4.4 billion of Russian mortgages were outstanding as of the middle of 2006, S&P said in its report, citing the Bank of Russia. There are about $10 trillion in U.S. home mortgages.

First Steps

The bond sale rated today is the first for Gazprombank, Russia's third-largest bank by assets.

The securities will be sold through Dali Capital PLC, a special purpose entity based in Ireland that has been involved in similar securitizations. Dali is also working with another special purpose entity, Gazprombank Mortgage Funding 1 SA in Luxemburg, which will first buy the loans from Sovfintrade.

Moody's and Fitch Inc. rated the first residential mortgage-backed securities transaction from Russia in July.

That $88.3 million deal was issued by a special purpose vehicle that bought loans from state-owned Vneshtorgbank, Russia's second-largest bank by assets. CityMortgage Bank of Moscow has also issued Russian mortgage-backed securities.

Untested Territory

S&P, Moody's and Fitch have cautioned investors about the limited history of the mortgage and housing markets in a free-market Russia and cited the newness of mortgage and securitization laws in Russia as a risk to bondholders.

``Securitization is a novel practice in Russia and securitization concepts have not yet been tested in the courts,'' S&P said.

Many of the aggregators of the loans are also new to the market, S&P and Moody's said, which poses risks to bond investors along with creating a beneficial standardization.

Moscow-based Sovfintrade, which bills itself as the fifth-largest Russian mortgage lender with $393 million of loans outstanding, entered the market last year and it mostly buys loans from lenders.

The securitization rated today, includes 8,820 underlying loans, with balances of 5.76 billion rubbles, according to Moody's. Barclays Capital and Gazprombank are managing the sale.

The new laws in Russia also enable lenders there for the first time tap new financing for mortgages through the about $2 trillion-euro market for so-called covered bonds, which involves sales of AAA bonds backed by home loan that remain on banks' balance sheets, according to the European Covered Bond Council.

To contact the reporter on this story: Jody Shenn in New York at

To contact the editor responsible for this story: Robert Burgess at

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