VTB-24 Tries Luck With Mortgages

These days, the term "mortgage-backed securities" seems enough to send most investors running for the hills. So why has VTB-24 just now decided to securitize $473 million in mortgage loans?

VTB-24, the retail arm of No. 2 state bank VTB Group, has announced that it will begin selling the securities this quarter on the Irish Stock Exchange, and the bank is in the market for potential investors, financial director Michael Berezov said in a statement e-mailed Friday.

By Western standards, the local market for securitization is still young, with laws enabling banks to sell mortgages passed only in 2006. And although the world is mired in a financial crisis that many trace back to the practice of bundling high-risk mortgages into highly rated bonds, such securities continue to be issued in many countries, including the United States.

The VTB mortgage-backed securities -- or MBSs, for fans of repackaging -- have one major advantage, however, in the form of a state guarantee from the Agency for Mortgage Lending, Russia's equivalent to Fannie Mae. In most other markets the bonds were tied to the issuing bank's credit ratings.

VTB-24 signed an agreement on a securitization program with UniCredit and Deutsche Bank in 2007. Both banks were unavailable to comment on the new issuing Friday.

Finance Minister Alexei Kudrin said in December that the state would provide the mortgage agency with 200 billion rubles ($6.15 billion) to support the local mortgage market. The sum was equal to $7.2 billion at the time.

In return, the mortgage agency has promised to buy mortgages and provide guarantees on MBSs bought by Vneshekonombank and the Pension Fund to help bring liquidity to an otherwise frozen marketplace.

The guarantee helped the securitization win an A2 rating from Moody's, but it's still no promise that VTB-24 will be able to find the buyers.

"Foreign investors are already going to be skeptical of anything coming out of this segment, and they'll be doubly skeptical because it's coming out of Russia," said Ronald Smith, chief strategist at Alfa Bank. "It will be a challenge for the bank to place these securities at a reasonable price," he said.

The VTB-24 securities have a coupon of 7.5 percent per year, and the transaction's loan-to-value ratio -- or the average mortgage amount divided by the property's value -- is 66.5 percent.

In a report on the issue, ratings agency Moody's said the securities benefited from the strength of the underlying loans but that falling housing prices in Moscow and St. Petersburg were a detriment.

Marina Vlasenko, senior CIS credit analyst for Commerzbank, expressed doubt that the securities would actually sell given that demand is virtually nonexistent and the coupon of 7.5 percent is unreasonably low.

"Maybe [the state guarantee] will help a little, but it will not replace the 7.5 in your mind," she said.