...a small bank and broker. Impact on outstanding RMBS deals.

Vedomosti reported today that according to different sources KIT Finance, a small Russian bank and broker, was not able to service REPO obligations worth RUB 6-8 bn. KIT Finance says in their press statement that they started to experience problems as some of their clients were overdue on their payments.

 

In our view, the situation looks more like confidence crisis rather than any lack of liquidity within the financial system. The average level of nostro balances with the Central Bank of Russia (CBR) amounted to RUB 711.5 bn since the beginning of September, which is a quite healthy level. However, the counteraction of several factors triggered a situation where liquidity distribution among banks was damaged causing the weakest link to fail.

 

Firstly, Russian equity market sold off aggressively during the past days as foreign investors were pulling money out of the country, and according to local sources some smaller financial institutions started to experience liquidity pressure from margin calls on repo’d equity positions. Secondly, the high yield segment of the local bond market was also hit hard. The fact is that Russia lacks any diversified investor base, so banks themselves were here the main sellers. While institutions, experiencing liquidity constraints, were seeking to sell at any price, this only further added oil into fire. When the crisis escalated, several large liquidity providers cut limits and withdrew themselves from interbank REPO operations making funds available only to a small group of larger institutions (source: Kommersant). The rest of the story is known to the public from mass media reports.

 

Still, we believe the authorities and the regulator will turn supportive to limit possible contingency effects and prevent further banks from falling down. Yesterday the Ministry of Finance placed RUB 150 bn among the banks, today these funds will reach the financial system. Further RUB 275 bn should be made available during today’s auction. While we have been writing this piece, VTB announced that it “is prepared to help KIT Finance solve its problems with payments owed to the bank on REPO deals” (source: Prime-TASS).

 

As of end-2007, KIT Finance had RUB 6.4 bn in retail deposits, which is negligible given the size of this market in Russia. However, given the fact that the news is already in the press and Russian retail depositors proved to be flighty in the past causing damage even to healthy financial institutions, we believe that CBR (perhaps in cooperation with state-owned banks) will find an appropriate solution. According to Prime-TASS, KIT Finance said that it was in talk with a strategic investor about a possible stake purchase. The bank said that the talks would be completed by late Wednesday.

On a separate note, we do not know whether KIT Finance is in default our not. According to local sources, the bank delayed payment on several REPO transactions, although no court action against KIT has been announced yet.

 

KIT has been originating and administering mortgage loans since 2005. In 2008, it was involved in 2 RMBS transactions as originator, servicer and a co-arranger.

 

 

Source: Dealogic

 

Since we are not in the possession of relevant “KIT Ipoteka” documentation we restrict ourselves to commenting on the Rumba I deal.

 

Russia’s Citymortgage Bank (owned by Morgan Stanley) is a designated Stand-by mortgage administrator (Back-up servicer) for the Rumba I transaction. As yet, we have not been informed of any event (stipulated in the Mortgage administration agreement) that would trigger the exchange of the servicer. Investors however bear these types of risks pertaining to the default of the originator/servicer:

 

·              Insolvency management, a bankruptcy administrator, liquidator or various creditors may seek to challenge the "true sale" of the mortgage certificates to the Issuer. If a Russian court were to determine that the transfer of the mortgage certificates to the issuer was not a "true sale", the court could choose to unwind the entire transaction, which would force the return of the mortgage certificates to the originator. Additionally, in cases of bankruptcy, Russian courts may, at the request of the bankruptcy administrator or a creditor, void any transaction of the bankrupt entity from the three previous years if such transaction was made on terms "materially worse" than the terms of analogous transactions. The interpretation of the term "materially worse" under Russian law remains vague.

·              Commingling risk: In the event that any bankruptcy proceeding is introduced with respect to the mortgage administrator, or its banking license is revoked, it is unlikely that a Russian court would segregate money held in any customer's account, in the collection account or the administrative account due to the issuer from the mortgage administrator's estate, and the Issuer would rank as an unsecured creditor in respect of its claims.

 

Source: Prospectus

 

No quotation is available for any of the transactions’ classes.