February 06, 2008 |
|Fitch Ratings-Frankfurt/London-6 February 2008: Fitch Ratings has today assigned expected ratings to the debt obligations of Russian Factoring No. 1 S.A. (the issuer) as follows:|
- RUB 7.5bn senior asset-backed notes: ‘BBB’; Outlook Stable
- RUB 0.5bn mezzanine facility: ‘BB’; Outlook Stable
The expected ratings address the timely and full payment of principal and interest. The ratings exclude any claim of the lenders to receive prepayment charges as well as interest payments equal to the step-up margin. The final rating is contingent upon receipt of final documents conforming to information already received.
The transaction is a securitisation of receivables factored by Eurokommerz FC refinancing small- and medium-sized companies within the Russian Federation (‘BBB+’/Outlook Stable /‘F2’). The issuance is denominated in local currency as are the receivables. Until the expected maturity in September 2008, collections will be re-invested in further purchases on a daily basis unless an early amortisation is triggered or the un-invested cash exceeds 15% of the senior notes balance, leading to partial redemption of the exceeding amount. In addition to early amortisation events, the transaction includes triggers that suspend further purchases and which lead to amortisation in case the performance of the portfolio deteriorates beyond trigger levels.
Eurokommerz FC is a closed joint stock company incorporated under Russian law. It pursues factoring business since inception in 2000. The originator is currently owned by the group’s management team (49.8%) and the Russian New Growth Fund (50.2%). Total assets were at RUB1.4bn at year-end 2007 and the company’s equity ratio currently stands at about 27% of total assets. Asset growth slowed down over the second half of 2007 after two years of strong growth.
As of beginning of February 2008, the originator acquires receivables from around 2,000 customers against around 6,500 debtors. Debtors and customers are located throughout the Russian Federation with a certain concentration in the Moscow region (about 18% for debtors and 23% for customers). Day sales outstanding over the past two years averaged at 55 days.
Russian legislation is unclear whether factoring (defined in the civil code as “financing against assignment of monetary claims”) is subject to supervision by a regulating authority and whether Eurokommerz FC would require a licence from such an authority to pursue its factoring business. Based on current legislation, it can be argued that only entities that are licensed as a bank can pursue factoring. However, according to the transaction's legal counsel and the originator, no procedure is in place to obtain a separate licence just on factoring activity.
The legal counsel to the transaction has confirmed in its legal opinion that Eurokommerz FC, in their view, does not need any licence or regulatory permit to enter into the agreements with its customers in the form reviewed by the counsel and to exercise its rights and perform its obligations. Interested parties may wish to form their own view on the matter in consultation with its legal counsel.
The transaction includes a dynamic enhancement mechanism in line with Fitch’s trade receivables criteria (see “Global Rating Criteria for Trade Receivables” published on 28 January 2008). However, in line with the agency’s criteria for the analysis of portfolios located in emerging regions, rating multiples were calibrated to the rating of the Russian Federation. The enhancement calculation sizes for three reserves are: (a) loss reserve, (b) carrying cost reserve and (c) commingling reserve - all provided by subordination through the subordinated loan. Dilutions are covered by full recourse against customers to make up the reduction in the invoice amount. This turns dilution risk into credit risk covered by the first reserve.
While historical delinquencies are negligible, supported by the practice of customers to make payments on behalf of debtors to avoid delinquency charges, the documentation foresees a minimum loss coverage of 8.5% for the senior notes and 6.0% for the mezzanine facility. Enhancement is provided by the deferred purchase price agreed between the originator and the customer (10.7%), the subordinated loan (8.0 %) and the mezzanine facility (5.4%) with amounts as of end of January 2008.
To mitigate commingling, the transaction channels all payments via accounts held by a “collection agent”. On a daily basis, the collection agent (a Russian limited liability company), will receive payments from debtors and customers in collection accounts held with Slavinvestbank (SIB, rated ‘B-’ (B minus)/ on Rating Watch Positive/‘F3’). Intra-day it will pass collections on to the issuer and originator depending on reconciliation advice given by the servicer. Upon certain events linked to SIB’s performance, collection accounts are to be closed, preventing any further money to be credited to accounts with SIB. Customers and debtors will be required to pay into the standby collection account held with Vneshtorgbank JSC (VTB, rated ‘BBB+’/Outlook Stable/‘F2’). VTB also acts as a hot backup servicer able to take over servicing as well as daily reconciliation on short notice. Handover routines are tested and documented and are, in the agency’s view, strong mitigating factors against operational risks associated for assets with a high repayment speed.
Based on documented grace periods within the agreements and Fitch’s judgement on the duration of operational tasks to be performed by the different entities in case an immediate handover becomes necessary, Fitch concluded that up to six days of collections are exposed to commingling and lost from the issuer’s perspective. The dynamic enhancement calculation takes this factor into account, testing the expected amortisation profile for the six consecutive days that show the maximum cumulative payment amounts. The dynamic mechanism therefore also covers changes in the tenor structure.
The issuer also holds a cash reserve to cover a potential liquidity shock. The amount held in the account is determined monthly to cover about three months of interest payments due under the rated debt and senior expenses.
|Status||Default||Country of risk||Maturity (option)||Amount||Issue ratings (M/S&P/F)|
|redemption default||Yes||Russia||03/15/2010||4,180,000,000 RUB||-/NR/Withdrawn|
|Full company name||Eurokommerz|
|Country of risk||Russia|
|Country of registration||Russia|