Rating uplifts now possible for Russia covered bonds

Author: Danielle Myles | Published: 11 Dec 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The first Russian covered bond issuance to receive a rating higher than its issuer could prompt more use of the capital raising tool by the country’s fragmented banking sector.

Yesterday Moody’s assigned a definitive Baa1 rating to DeltaCredit Bank’s R5 billion ($160 million) covered bond deal – two notches above the issuer’s corporate rating.

Russia’s biggest banks have to-date only issued a handful of covered bond deals. DeltaCredit’s deal opens the market to Russia’s many small to medium-sized banks, which previously did not believe they had the credit rating to support a covered bonds offering.

“Before this deal, the possibility to receive an uplift on a covered bond transaction in Russia was quite unclear,” said Ekaterina Pervova, counsel and corporate secretary of DeltaCredit.

Based on the existing legislation and covered bond structure, many were pessimistic about the possibility of an uplift.

“No one really wanted to be the first one to test it,” said transaction counsel Vladimir Dragunov of Baker & McKenzie in Moscow. “This deal demonstrates that you can get this uplift. I think it really opens the road to a number of other issuers.”

Moody's awarded the rating on the basis of the quality of the cover pool, which provided additional security to investors, as well as the analysis of relevant Russian legislation, in particular Federal law No 152- FZ On Mortgage Backed Securities, said Pervova.

There was no overcollateralisation.

Typically, Russian covered bond transactions were rated on the basis of the issuer or guarantor’s credit rating, without taking into account the underlying structure of the transaction, the robustness of the Mortgage Securities Act and the value of the cover pool.

A lot of work was put in on this deal to provide the necessary legal comfort on the transaction structure and the operation of the Mortgage Securities Act.

Explaining to Moody’s the particulars of Russia’s covered bond law, including the degree of investor protections, was another significant factor. As noted in the agency’s pre-sale report, Russian law dictates that separate bond issuances must be backed by separate cover pools.

A framework that discourages the issuance of multiple bonds out of a single programme is a credit-positive, the report states.

Tear sheet

DeltaCredit’s R5 billion mortgage covered bond transaction was placed and rated Baa1 by Moody’s on December 11. The underwriters were VEB Capital and Rosbank.

Transaction counsel: Baker & McKenzie

Related articles:

2012 Covered Bonds guide http://www.iflr.com/Supplement/86128/Supplements/Covered-bonds-2012.html