EEMEA Gains A Foothold In The Global Securitization Market ...

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SECTION II: BENEFITS AND LIMITATIONS OF EEMEASECURITIZATIONSWhat Benefits Does Securitization Provide EEMEA Participants?The heightened interest in securitization from the EEMEA region primarily stems fromthe opportunities provided to the parties involved. Through securitization, issuers(companies, banks, and governments) can diversify their financing options by targetingdifferent investors and procuring longer-term funds. In some circumstances securitizationcan provide a cheaper source of funding — particularly when the rating on the issuednotes is higher than that on the originator or even the sovereign rating on the country inwhich the originator is located — but the high transactional fees involved often more thancompensate for savings on the spread. Further incentives include capital efficiency andlimiting credit exposure to the assets.Furthermore, securitization typically leads to a better understanding of the assets by theoriginator, thereby potentially improving credit risk management, operating efficiency,and product and customer focus. In order to comply with the standards necessary toobtain a rating and gain investor acceptance, there is an operational level — e.g.,underwriting, servicing, information technology, and treasury — that needs to be attained.The benefits to the investor include access to previously unavailable markets (oftendomestic) and receiving a higher return than comparably rated government, bank, andcorporate bonds. Asset-backed transactions have historically performed better in terms ofdefaults and downgrades than rated corporate debt. Another more general advantage is thepotential deepening of domestic capital markets, arguably fostering growth in theunderlying assets, e.g., home ownership and potentially providing local and regionalgovernments with financing for large projects.What Are The Main Risks Facing EEMEA Securitization?There are several potential impediments that could hamper the growth of existing-assetsecuritization in EEMEA. These include the uncertainty and untested nature of the legalenvironment in the countries new to securitization; the need for pioneers in these newcountries to truly want to diversify their funding sources; the amount of developmentand/or the initial costs of doing a transaction for the first time; and the danger that thecurrent quality of assets will not be sustainable in a rapidly expanding consumer creditenvironment (as mentioned in the "RMBS provides the greatest potential for issuance inRussia" section above).Standard & Poor’s Page 12 of 20
SECTION III: WHAT ARE THE KEY CONSIDERATIONS IN RATINGEMERGING MARKET SECURITIZATIONS?On top of the standard analysis we carry out to assess the credit risk involved in anysecuritization, such as whether the cash flow is strong enough to support the debt, thereare some risks that are exacerbated when the transaction involves emerging markets.Outlined below is our approach to rating future flow transactions (the approach is thesame for any country, emerging or not, but the structure is generally not used indeveloped countries due to the high cost involved) and then the concerns that must beaddressed when using an existing-asset structure, particularly those accentuated orheightened in an emerging market.What Are The Main Analytical Assessments When Rating FutureFlow Transactions?There are three main analytical assessments we conduct when reviewing a future flowtransaction. Please refer to a report on these assessments, entitled "The Three BuildingBlocks of an Emerging Markets Future Flow Transaction Rating" (see "Appendix III" fordetails). To summarize, the first step is to conduct a business line risk assessment toevaluate the originator's ability and willingness to remain in business, and, morespecifically, to remain in the business line responsible for generating the flow ofreceivables being securitized.The second step is to carry out a structural risk assessment to determine if the structure ofthe transaction provides enough protection for the originator to obtain the desired ratingon the notes. The structure does not mitigate all risks, so the target rating must becommensurate with the remaining risks, i.e., if the originator involved has a 'BB'performance assessment, the structure alone cannot enhance the rating on the notes above'BB' without third-party support.The third element captures sovereign interference risk by assessing the government'swillingness to interfere, directly or indirectly, in a structured transaction. It should benoted that this is very different from the assessment of whether a sovereign will default onits debt obligations, as a government does not necessarily need to default in order tosuccessfully interfere with a transaction. Given the different circumstances of specificoriginators, industries, and assets within a country, this assessment may not be uniformacross all structured transactions within a country.What Are The Concerns Specific To Existing-Asset Transactions?In the securitization market, participants often seek to structure transactions such that themost senior class of notes can achieve a 'AAA' rating. However, emerging marketcountries typically have a sovereign rating far removed from the 'AAA' level (see theimage below for the foreign currency sovereign ratings on key EEMEA countries) andwhile it can be possible to achieve a rating higher than the sovereign ratings in somecases, the rating elevation may be limited since it is dependent on perceived sovereignrisk and credit enhancement requirements.Standard & Poor’s Page 13 of 20
Page 4 and 5: Future flow transactions are curren
Page 6 and 7: South Africa has led the region in
Page 8 and 9: Standard & Poor’s Page 8 of 20
Page 10 and 11: In Eastern Europe, the Czech Republ
Page 14 and 15: It is difficult to rate an existing
Page 16 and 17: techniques is one of the key hurdle
Page 18 and 19: (SPUR)TIB Diversified Payment Right
Page 20: APPENDIX III: RELATED RESEARCH• "

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