Structured finance and securitisation in the Russian Federation: overview

A Q&A guide to structured finance and securitisation law in the Russian Federation.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured finance and securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-guide.

Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Market development

The Russian market has become more developed in recent years. At its inception around ten years ago it saw cross-border securitisations involving offshore special purpose vehicles (SPVs) and a number of asset classes, including mortgage loans and leasing, consumer and auto loans, credit card receivables and diversified payment rights (DPRs).

In terms of domestic securitisations, historically Russian legislation only regulated domestic residential mortgage-backed transactions (RMBS) and did not permit securitising via a local SPV any other contractual receivables such as consumer loans, credit cards, auto loans, leasing portfolios and SML receivables by issuing domestic asset-backed securities (ABS) bonds.

Previously Russian law did not recognise a number of basic legal concepts which are instrumental in structuring international-style securitisations. These included the notions of local ring-fenced SPVs, bonds backed by pledge of contractual rights, contractual agreements on waterfall and subordination (including as between contractual and bond claims), limited recourse bonds, bond trustee and security agent, bondholders' meetings, escrow accounts and pledge of accounts. Lack of recognition of these concepts meant that, with the exception of domestic RMBS, the originators, sponsors and arrangers had to rely on non-Russian SPVs (usually established in Luxembourg, the Netherlands or Ireland) and mostly English law-governed notes in structured finance deals.

The new Federal law No. 379-FZ dated 21 December 2013 "On Amendment of Certain Legislative Acts of the Russian Federation" (ABS Law) made all these constructs available from July 2014 which radically expanded the structuring flexibility for domestic and cross-border transactions. The new legislation also enables the issuance of highly structured project bonds involving special bankruptcy remote project finance vehicles. These vehicles may be used to raise bond financing in infrastructure public private partnerships, concession, leasing and other potential investment projects. Finally, the new legislation also introduced the procedures for changing the terms and conditions of domestic bonds based on bondholder meeting vote which provides a platform for restructuring, consent solicitation and liability management options in respect of domestic bonds.  

Notable transactions

Some recent examples of domestic securitisation transactions include:

  • Issue by Vozrozhdenie Bank of RUB 3,45 billion RMBS in March 2014. Two tranches (A and B) were issued with tranche A rated Baa3 by Moody's (as of 1 May 2015).

  • Issue by VTB of RUB 28,8 billion RMBS in January 2014. Two tranches (A and B) were issued with tranche A rated Baa3 by Moody's (as of 1 May 2015).

  • RUB5 billion consumer loan securitising by Home Credit & Finance Bank in November 2013, the structure of which employed two SPVs: one domestic and one offshore. The issue was rated Baa3 by Moody's (as of 1 May 2015).

The Russian securitisation market has largely been concentrated around the banking sector in recent years.

The Central Bank's initiatives

The Central Bank of Russia is currently in discussions with market players on what may be done in terms of permitting the inclusion of ABS bonds in the Lombard List. So far this was mostly available for domestic RMBS bonds which are either rated by an international rating agency or benefit from the AHML (state owned company responsible for promoting housing mortgage lending in Russia) guarantee. Following recent regulatory amendments, the Central Bank of Russia can include the RMBS and securities issued by non-financial companies in the Lombard List without meeting the abovementioned requirements but subject to analysis of the issuer and terms of the securities.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

The following principal laws form the legislative framework for asset-backed and mortgage securitisations in Russia:

  • Federal law No. 379-FZ dated 21 December 2013 "On Amendment of Certain Legislative Acts of the Russian Federation" (ABS Law).

  • Federal Law No. 152-FZ dated 11 November 2003 "On Mortgage-Backed Securities" (as amended) (MBS Law).

The Central Bank of Russia (CBR) is the main regulator for the securities and banking markets. In the last two years the previous securities regulator (the Federal Service for Financial Markets) merged into the CBR to make a single mega-regulator in the financial markets.

The CBR is the authority responsible for passing implementing regulations under the ABS Law.

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation

The major driver for securitisation in the current under-capitalised domestic market is the need for refinancing which is available from the CBR and certain other state-owned institutions. Other usual reasons for securitisation include:

  • Allocation of portfolio credit risk between originator and investors.

  • Possible assignment of the issue's credit rating higher than that of the originator.

  • Diversity of funding sources both domestic and international.

  • Release of reserves due to transfer of receivables.

  • Balance sheet benefits.

  • Portfolio and risk management reasons.

Risk retention requirements

Under ABS Law the originator must retain the risk in the amount of 20% of the ABS bonds. This is higher than the EU level for risk retention but the CBR insisted on this for domestic securitisations.

In its implementing regulation the CBR established the forms and procedure for calculation of such risk retention. The forms of risk taking include the following:

  • Acquisition of junior tranche bonds.

  • Issuing a guarantee.

  • Providing a loan subordinated to senior bonds.

  • Acquisition of shares in the SFO.

Accounting practices

Although under Russian accounting rules orphan SPVs may be presented as deconsolidated, the analysis under IFRS statements (which are also produced by Russian banks) may be different which may diminish the benefit from RAS deconsolidation. The deconsolidation issue is subject to detailed analysis of the originator and its auditors.

Capital adequacy

Russia has historically used stand alone regulatory capital rules which to some extent relied on Basel I provisions. The CBR traditionally has a lot of discretion in terms of formulating regulatory capital requirements for local banks. More recently the CBR made a number of large-scale amendments to its regulations in order to implement Basel III provisions relating to regulatory capital.

Additional regulatory capital requirement (N18) applies to balance sheet RMBS of Russian banks: minimum ratio of mortgage collateral to the volume of bond issue equal to 100%.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

Form and legal status of the SPV

The ABS Law and MBS Law recognise two categories of domestic securitisation vehicles:

  • A special financial company (specializirovannoe finansovoe obshestvo or the SFO) designed for asset-backed securities.

  • A mortgage agent (ipotechnyj agent or the MA) which is used for mortgage securitisations.

These two securitisation vehicles are built on a largely similar model but there are also some differences:

  • Both types of SPVs should be managed by a professional management company. Management companies of the SFOs are regulated by the CBR and must comply with statutory criteria and be included on a special CBR list.

  • Several important corporate law restrictions (negative net assets rules and so on) do not apply to the SFOs and the MAs.

  • Legal capacity of the SFOs and the MAs is statutorily limited to activities associated with the purchase of contractual receivables and issuance of the bonds and certain listed related activities.

  • The SFO cannot have a management board, board of directors and audit committee, whereas there is no such express restriction for the MA, except for the prohibition of having employees. In practice, however, due to bankruptcy remoteness requirements the MAs in most RMBS deals do not create a board of directors or management board.

On the differences of the bankruptcy regimes for the SFO and the MA see Question 6.

Ownership

Ownership structure of domestic SPVs depends on the various business considerations. However, for tax and bankruptcy remoteness reasons, domestic SPVs are often set up as orphan companies owned by foreign charitable funds such as Dutch stichtings.

There are also instances where local SPVs are owned by local Russian charitable funds.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

Russian securitisation market is dominated by domestic securitisations and SPVs for such transactions are incorporated in Russia.

In previous years there were many cross-border (offshore) securitisations and such transactions are still possible on a cross-border basis with Russian originators. In such deals Ireland, the Netherlands and Luxembourg are usually the jurisdictions of choice for the SPV establishment due to their market, legal and tax conditions. Moreover, all these countries have double-tax treaties with Russia.

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

Insolvency remoteness in domestic RMBS deals has been improved with the amendments made by the ABS Law. This extended to the MAs the application of certain SFO provisions relating to initiation of insolvency (with the consent of the bondholders) and bankruptcy proceedings being limited to supervision (nablyudenie) and competition management (insolvent liquidation) (konkursnoe upravlenie) as well as non-petition and limited-recourse provisions. Insolvency remoteness of the SFOs under the ABS Law rests on:

  • Their corporate structure (involving corporate management services provided by the management company).

  • Their special bankruptcy process which can only be initiated by the senior bondholders acting via the bondholders' representative (which is similar in some respects to an English law trustee).

  • The possibility to build in limited recourse and non-petition clauses.

The statutory bankruptcy regimes for the SFO and the MA are different, although they are intended to achieve a similar level of bankruptcy remoteness:

  • Mortgage collateral securing the RMBS bonds is expressly excluded from the bankruptcy estate of the MA.

  • Collateral securing asset-backed securities issued by the SFO falls within the bankruptcy estate of the SFO. However, there is a detailed bankruptcy procedure for the SFOs which enables the use of limited recourse and non-petition provisions in the bond documentation and regulates the sale of collateral property during insolvency.

  • Puts the right to initiate bankruptcy proceedings against the SFO in the hands of the bondholders' representative based on the vote of the senior bondholders.

  • Limits applicable bankruptcy procedures to supervision (with its timing limited to a month after initiation of bankruptcy) and competition management.

To encourage the use of localised securitisation structures and help improve the ring-fencing of domestic SPVs, the new ABS Law allows bondholders and other creditors to agree non-petition clauses where the exercise of their statutory right to file a petition for bankruptcy of the SPV is expressly conditional on "the occurrence of certain pre-defined events" (for example, redemption of the bonds) or "expiry of specific time periods". Bondholders and creditors of the SFOs can agree limited recourse clauses in the bond terms and conditions by providing that the bondholders' and creditors' claims will expire upon completion of enforcement against the collateral securing the bonds or other contractual claims.

Since the ABS Law was adopted relatively recently, many of these ring-fencing measures have not been tested in courts. There is no court guidance yet on the application of special SFO bankruptcy procedures or limited recourse and non-petition clauses.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

Under Russian Law, the principle of separate legal personality is generally upheld by the courts. Due to this principle the portfolio validly transferred to an SPV should not form part of the originator's bankruptcy estate.

However, Federal Law No. 127-FZ of 26 October 2002 "On Insolvency (Bankruptcy)" (the Bankruptcy Law) provides certain specific grounds (in addition to general civil law grounds) for invalidation of, or refusal to perform, transactions of a distressed originator (see Question 17).

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

The decision is largely based on business considerations and market conditions of a specific transaction, although public offering tends to be a more popular option. Public issue may be preferable where particular classes of investors are targeted (including non-government pension funds and insurance companies) due to regulatory requirements. More importantly, listing on the local exchange is one of the conditions for inclusion of securities in the CBR's Lombard List for the purposes of CBR refinancing facility.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

Securities publically issued by the domestic SPVs are usually listed on the Moscow Exchange (MOEX) because of its well developed infrastructure and exhaustive access to the Russian financial markets.

The list of documents to be submitted for listing on the MOEX depends on the level of listing (uroven' spiska). Securities issued by domestic SPVs are generally listed on the third level list (unquoted) which requires the following main application documents to be filed with MOEX:

  • Corporate documents (including, corporate resolutions on the appointment of a person who signed the application for listing).

  • Documents concerning the issuance and registration of securities.

  • Other documents that may be requested by the MOEX.

To broaden the classes of potential investors eligible to buy the securities (for example, non-state pension funds), the securities may be required to be listed on the higher quotation list. In this case the additional conditions depending on the level of quotation list are to be met, including:

  • Volume of the issue.

  • Maximum face value of securities.

  • Disclosure of the financial statements prepared in accordance with IFRS or other internationally recognised accounting standards.

  • Absence of defaults of the issuer in the specified periods.

  • Corporate governance requirements.

As regards cross-border securitisations, securities are usually listed on the Irish Stock Exchange and the London Stock Exchange.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

Russian law does not recognise the conception of holding assets or security on trust. However, following recent legislative amendments the bondholders' representative, which is similar in some ways to an English law trustee, was introduced (see Question 20).

Securities issued by Russian SPVs may be either certificated or uncertificated ones. The terms and conditions of uncertificated securities are documented in the "decision on issuance" which must be registered with the CBR. As regards certificated securities, the decision on issuance and the global bond certificate are the documents that incorporate the terms and conditions of securities. In case of any discrepancies between the decision on issuance and the certificate, the latter will prevail.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

Historically, Russian law permitted only mortgage-backed securitisation in the domestic market (see Question 1). Other asset classes used to be securitised on a cross-border basis using offshore SPV issuers. The ABS Law recognised a wider range of receivables available for securitisation, including:

  • "Monetary contractual claims" (this may include consumer, auto and SME loans, DPRs, leasing contracts and related physical assets).

  • Other assets that may be listed by the CBR from time to time.

The mortgage loan receivables continue to dominate the Russian securitisation market. Regarding the second bullet point above, the CBR has indicated that it intends to further broaden the list of assets allowed to secure securitisations beyond guarantees, securities, monetary claims and related assets.

 

Transferring receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The transfer of loan receivables may be structured as a purchase and sale agreement or other transaction including contribution into the charter capital of the SPV. However, the latter option is not available for the SFOs where shares must be paid in cash.

The Civil Code requires that the transfer of contractual receivables should be documented in writing and if the assigned contract is subject to state registration (for example, certain types of real estate leases) and/or was notarised, the transfer instrument should also be so registered and/or notarised. Under Federal Law No. 102-FZ "On Mortgage (Pledge of Real Estate)" of 16 July 1998, as amended (Mortgage Law) assignment of mortgage is contingent on its state registration. The RMBS Law and the Mortgage Law provide that mortgage certificates (transferable securities evidencing the mortgage loan) may be transferred without the need for the state registration, subject to the borrower's right to demand presentation of such mortgage certificate as a condition to payment to the new transferee.

Assignment of receivables is usually accompanied by a notice to the underlying borrower (debtor) informing it of the assignment and, in the context of local securitisation, often confirming that payments should continue to be made to the originator acting as a servicer until a notice to the contrary (and identifying the new payee) is received by the debtor from the named assignee.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

Securitisations of some receivables like air tickets receivables, certain local DPRs, utilities payments and certain types of mature leasing receivables may be difficult to implement in the local market for a variety of contractual, tax and legal reasons. However, recent legislative changes expressly permitting to secure domestic bonds with the pledge of any monetary claims broadens the opportunities for securitising such monetary receivables. In addition, CMBS and whole business securitisations have not been tested locally.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

The security attached to the receivables generally transfers to the SPV automatically with the assignment of the secured receivable. Pledge of certain assets (for example securities, mortgage) may be subject to re-registration. Transfer of mortgage is subject to state registration, unless the mortgage loan is evidenced by a mortgage certificate (see Question 12).

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

An assignment of claim may be prohibited or restricted by the underlying agreement between assignor and obligor. However, if a monetary claim arising from B2B arrangements with a contractual prohibition on transfer is transferred, the assignor is liable to compensate the debtor's damages, but the transfer itself is effective as a legal matter. This provision applies to monetary claims arising from any contractual arrangements effective from 1 June 2015.

Legislative restrictions

An assignment of rights is not permitted without the consent of an obligor where the creditor's identity is of significant importance to the obligor. Moreover, any consent of all several and joint creditors is required for the assignment of rights by one of them, unless otherwise agreed in the contract.

Russian law and court practice is inconsistent on both whether a bank may transfer a claim arising from a consumer loan, especially to a non-banking organisation (such as the SPV), and also what conditions are to be met for effectiveness of such transfer.

One should also consider personal data consent requirements and bank secrecy regulations which are rather broadly drafted and leave some room for debate as to whether the client's consent provides full protection. There are some positive court cases dealing with the client consent issue which the market derives comfort from.

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

Russian law recognises assignment of contractual rights (receivables), subject to formalities discussed in Question 12. At the same time, Russian courts have a general statutory discretion to recharacterise transactions as a sham where the circumstances of the case indicate that the parties may have intended a different transaction, including a transaction with different terms and conditions, in which case the court is authorised to apply the consequences of the trade which the parties actually had in mind. From this perspective, a risk of recharacterisation of a specific transfer of receivables in a specific transaction depends on the facts of the matter and cannot be completely excluded. Historically there have been some negative court cases relating to recharacterisation of receivables assignments (including in respect of the future receivables). However, from 2007 the High Arbitration Court (highest state court for commercial disputes before its merger with the High Court in 2014) issued some positive guidance on the general recognition of existing and future rights assignments which minimised the recharacterisation risk in a standard securitisation of loan or lease receivables. One needs to carefully analyse additional structural features in the receivables transfer instrument (for example, put or call options of the originator etc.) from the point of view of any recharacterisation risk.

True sale opinions have been delivered in respect of rated Russian domestic and cross-border securitisations.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

In accordance with the Bankruptcy Law, certain transactions may be declared invalid by a court during insolvency proceedings of the distressed originator, including the following:

Violation of creditors' rights. A transaction concluded by the originator within the three years preceding the acceptance by the court of the bankruptcy petition (the "date of the bankruptcy petition") if:

  • The transaction is aimed at "infringing creditors' rights".

  • The creditors' rights have been infringed, as a result of the conclusion of the transaction.

  • The other party to the transaction knew, at the moment the transaction was concluded, that the transaction was aimed at infringing creditors' rights.

Preference. A transaction concluded by the originator "with a creditor or any other person" within one month (or, in certain cases, within six months) preceding the date of the bankruptcy petition if it results or may result in the satisfaction of the claims of one of the creditors in preference to the other creditors' claims.

Transactions at undervalue. A transaction concluded by the originator within one year preceding the date of the bankruptcy application if the consideration provided by the other party is "inadequate", in particular where the price or other terms of the transaction are "materially worse than those of analogous transactions concluded in comparable circumstances" (for example, where the value of the assets or other consideration provided by the originator is significantly greater than the value of the consideration provided by the other party, taking into account the terms and circumstances of such consideration).

As far as banks are concerned, the abovementioned hardening periods are generally calculated from the date of appointment of temporary administration in respect of such credit organisations.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

In domestic securitisations the transaction documentation is primarily governed by Russian law. It is common to choose foreign governing law (usually English law) in cross-border securitisations involving offshore SPVs.

Russian law generally permits Russian parties, when dealing with foreign entities, to choose the law governing the civil law rights and obligations of the parties under a contract. The choice of foreign law should be generally recognised in Russia, subject to certain statutory limitations on application of foreign law including:

  • The rules on the establishment of the meaning and content of foreign law.

  • Application of "mandatory provisions" or provisions which are of "special significance" in accordance with Article 1192 of the Civil Code ("rules of direct application").

  • Public policy grounds, in particular where such application would be obviously contrary to "legal order (public order)".

  • "Internal relationships of a Russian legal entity (including those between such legal entity and its shareholders)" which, in accordance with Article 1202(2) of the Civil Code, are determined under the laws of the country of incorporation of such legal entity.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

The principal type of security over the assets of a Russian domestic SPV is a Russian law pledge. The ABS Law specifically requires that the proceeds under the relevant pledged receivables securing the ABS bonds be credited to the special pledge account of the SFO.

Mortgages over real estate require state registration. Pledge over moveable assets does not have to be registered but it may require notarization to the extent the parties have opted for extra-judicial enforcement. In 2014, new pledge legislation introduced a notary register of notices in respect of pledges over moveable assets. Filing a pledge notice with such register is voluntary but if it is not filed this may have an impact on the determination of the pledge date and related issue of pledge ranking.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

As discussed in Question 10, under recent legislative amendments, from July 2014 Russian issuers can appoint quasi-trustees called bondholders' representatives as part of the bond documentation (voluntarily from 2014 and mandatorily from 2016). The bondholders' representative can also take security interest in the collateral backing the bonds on behalf of the bondholders which was historically impossible in a domestic bond issue.

The construct of trust has no direct equivalent in Russian law but foreign law trustees are normally used in cross-border securitisations to take the relevant foreign security on behalf of the note holders.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?

Methods of credit enhancement may vary from transaction to a transaction but the most commonly used credit enhancement mechanics are:

  • Over-collateralisation.

  • Creating subordinated tranches of notes.

 

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

The following techniques of liquidity support are commonly used in domestic securitisations:

  • Acquisition of the subordinated tranches of notes.

  • Subordinated liquidity facilities provided by the originator.

  • Financial assistance provided by the holder of preference shares of the orphan SPV (sometimes used for corporate originators such as AHML who cannot, as a regulatory matter, provide a liquidity facility).

  • Undertaking or option to purchase the defaulted receivables.

  • Creation of cash reserves at the SPV level.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

Russian domestic securitisations are largely in line with the cash flow index, subject to a few specific local features. National Settlement Depository acts as a payment agent for the MAs and the SFOs on the payments under the bonds. As far as payments of costs and fees of principal providers, are concerned in most cases these are calculated by the Calculation Agent and made from the SPV's account on the instruction from the Management Company of the SPV without involvement of any special paying agent. Also, whereas in a pre-default waterfall costs and fees may be put above the payments to the bondholders, in a post-default waterfall payment to the bondholders will be senior to the payments due to the providers. Note that swaps are not very common in Russian domestic securitisations.

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

Methods of profit extraction described in the Guide may be used in cross-border securitisations. Acquisition of the subordinated notes is the most commonly used method of profit extraction in domestic transactions.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

As of 1 May 2015, the Russian sovereign issuer rating is:

  • Ba1 (negative) as assigned by Moody's.

  • BB+ (negative) and BBB- (negative) for foreign and local currency respectively as assigned by Standard & Poor's.

  • ВВВ- (negative) as assigned by Fitch.

These ratings follow a recent downgrade action based on the following factors:

  • The continuing crisis in Ukraine as well as the existing and potential future international sanctions connected with it.

  • The perceived structural weaknesses in Russia's economy, in particular the strong dependence on hydrocarbons and other commodities.

  • Monetary policy inflexibility.

  • The erosion of fiscal strength and FX reserves.

In February 2015, due to the increase in country risk associated with the recent downgrade of sovereign rating, the ratings of some RMBS bonds issued by Russian SPVs were lowered by Moody's. An increased probability of high losses on the underlying collateral and deterioration of Russian credit environment were mentioned as other drivers of this downgrade.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

Special transfer taxes

There are no special transfer taxes in Russia. Transfer of receivables under cash loans from a Russian bank is not as such subject to VAT (18%). Transfer of other types of receivables may be subject to VAT, although in a particular transfer it may be possible to minimise such VAT charge.

In domestic securitisations, principal operations of the MAs and the SFOs, as described in the law and charter, are generally exempt from profits tax. However, in practice it is possible that tax authorities may question the conformity of particular transactions with the limited statutory and charter activities of the MAs and also the SFOs and their eligibility for the tax exemption. To reduce this risk the SPV's charter needs to have a detailed list of all main operations of the SPV.

In cross-border securitisations it is common to use SPVs from Luxembourg, Ireland or the Netherlands with which Russia has favourable double-tax treaties. Russia charges domestic withholding tax on income payable to foreign companies and interest is subject to a 15% withholding, unless a lower tax rate is set by a double-tax treaty. Tax authorities sometimes apply tax treaties restrictively, for example, questioning the applicability of treaties when income is paid to the SPVs (which could potentially be seen as not being the "beneficial owner" of such income for tax treaty purposes).

Other tax issues

Transfer pricing is potentially applicable to the price of receivables as follows:

  • Taxation of extraction of excessive cash.

  • Potential VATability of servicing fees.

Careful tax structuring is required in any Russian securitisation.

The Russian government was negotiating a treaty with the US relating to FATCA compliance, however this attempt failed. A law passed in June 2014 generally permits Russian financial institutions to disclose certain client information to US IRS, subject to several conditions to be complied with by such Russian financial institutions affected by FATCA.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

See Question 1 for a description of the recent securitisation laws reform. In addition, derivatives legislation is also developing and ISDA published a netting enforceability opinion in relation to Russia in 2015. This may expand the use of derivatives and hedging in Russian securitisations which historically have not been widespread.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

There have been a few cross-border CDOs and repackagings involving Russian assets and issuers, although synthetic securitisations as such are not used locally, including due to developing legal and regulatory framework for credit default swaps and other derivatives.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

Recent domestic reforms of pledge and securities legislation (see Question 1) have had a very positive impact on the local securitisation market by substantially increasing the structuring flexibility for local transactions. The CBR is expected to somewhat loosen its requirements for inclusion of securitisation bonds into its Lombard List and related rating requirements and make refinancing more readily available.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

Recent legislative reforms in Russia have had a positive effect on the local securitisation market, although it is still depressed by the continuing economic crisis in Russia.

 

Online resources

Official legislation

W http://pravo.gov.ru ( www.practicallaw.com/9-555-2708)

Description. Official webpage of legal information. Materials are available in Russian only.

Central Bank of the Russian Federation

W www.cbr.ru

Description. The official website of the CBR containing current and draft regulations and market information.

Russian National Association of Securities Market Participants (NAUFOR)

W www.naufor.ru/default.eng.asp

Description. The Russian language version of this site contains the texts of major laws and regulations, standard documentation in the sphere of capital markets, and so on.



Contributor profiles

Andrei Murygin, Partner

Linklaters

T +7 495 797 97 97
F +7 495 797 97 98
E andrei.murygin@linklaters.com
W www.linklaters.com

Professional qualifications. Russia; 1998 to 2002 Moscow State University, Faculty of Law, Postgraduate studies in Civil Law; 1993 to 1998 Moscow State University, Faculty of Law, MA Diploma in Law (honours degree)

Areas of practice. Structured finance; project bonds; securitisations; domestic bonds; cross-border derivatives; secured equity financing; repos; equity capital markets.

Recent transactions. Including:

  • The first Russian leasing receivables securitisation (Red Arrow) in 2006.
  • A number of AHML RMBS transactions.
  • Several Bank Vozrozhdenie RMBS issues.
  • Structured sales of mortgage and retail loan portfolios.
  • Vityaz and Red Square managed CDOs.
  • Infrastructure bonds for the M1 and M11 toll road construction projects.
  • EBRD and IFC domestic structured notes (including notes referencing precious metals prices, equity indices and inflation).
  • U1 Russian domestic bonds (first local bonds by a foreign corporate issuer).
  • The US$2.4 billion structured notes secured by pledge of local shares in Uralkali.

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