raising funding against the future flow of diversified payment rights: lessons for russia alex von...

Raising Funding Against theFuture Flow of Diversified Payment Rights: Lessons for Russia

Alex von SponeckHead of Central and Eastern Europe, Middle East and AfricaDebt Capital Markets OriginationMerrill Lynch InternationalTel: +44 207 996 3804Email: [email protected]

October 2006

Diversified Payment Rights Securitisation

Contents

Introduction 1

General Market Overview 2

DPR Securitisation Structure 6

Alfa-Bank Transaction Summary 9

Introduction

Introduction

Diversified Payment Rights (“DPR”) future flow securitisations have been an important source of funding for emerging market banks in a wide range of jurisdictions: Brazil, Peru, El Salvador, Russia, Kazakhstan, Turkey and Mexico

Alfa-Bank’s debut US$350 million DPR-backed offering was Russia’s first DPR securitisation – a number of other Russian banks are now preparing similar issuances

This presentation sets out:

A general overview of Future Flow Securitisations

A basic transaction structure for DPR future flow securitisations

A case study of the Alfa-Bank deal including the major issues Alfa-Bank faced in executing their deal

The advantages to an issuer of a DPR future flow securitisation programme, and lessons learned

1

General Market Overview

By Country / Region


Future Flow Securitisation Future flow securitisation became popular in emerging markets in the early 1990s as a mechanism to reduce sovereign related

risk and provide more attractive access to international capital markets This funding instrument has grown in emerging markets over the past 15 years, primarily in response to search for lower cost of

funds by companies that generate hard currency cash flows outside their country of domicile Future flow securitisations investments have consistently proven themselves to investors, and over the years they have

successfully mitigated a variety of the risks associated with emerging market investments Mexico and Turkey had been the dominating country for future flow issuance until 2001. Currently, there has been a significant

amount of issuance out of other countries and Eastern Europe and Russia have shown significant potential for strong future flow candidates:

Gazprom International S.A. (July 2004, US$1.25bn) (Merrill Lynch) Russia International Card Finance S.A. (Rosbank, November 2004, US$225m) (Merrill Lynch) Russia International Card Finance S.A. (Tap issue, February 2005, US$70m) (Merrill Lynch) Alfa DPR Finance Co (March 2006, US$350m) (Merrill Lynch)

Future Flow Issuance

1991-2006 to date (US$m)

Emerging Market Future Flow Securitisations – Market Overview

3%

8%

5%

18%

1%

31%

2%

0%

19%1%

3%3%

0%

6%

Argentina Caribbean

Central America Asia

Venezuela Turkey

Africa Peru

Russia Kazakhstan

Mexico Colombia

Chile Brazil

2


Types of Assets Securitised The types of assets securitised by these future flow securitisations have varied over the years The most common flow being securitised by corporates have been export receivables (e.g. Gazprom, Egypt General Petroleum Corp., Pemex, Indo Coal transactions) Financial remittances (Swift receivables or DPRs) have become the most popular future flow asset class for banks, with US$13.4 billion of remittances/diversified

payment rights (DPR) securitisations since 2002 DPR securitisations are closely followed by credit card receivables, which have totalled US$5.1 billion since 1998 DPRs are created as a result of the role of the emerging market financial institution as financial intermediary between foreign payers wishing to send funds to a

company or individual in that emerging market: It leverages existing export client relationships The funds are typically sent from countries rated investment grade Funds are denominated in hard currencies Use existing global standardised systems for transferring funds (Swift) Funds are captured offshore to mitigate sovereign intervention, inconvertibility and transferability events The following overview will focus solely on DPR securitisations, which is a subset of the emerging market future flow securitisation universe

Market Share – Types of Assets

1991-2001 (US$m)

Emerging Market Future Flow Securitisations – Market Overview

2002-2006 YTD (US$m)

Export ReceivablesRemittances/Diversified Payment Rights

OtherAirline ReceivablesCredit Card Receivables

3


The DPRs sold in a DPR securitisation are sourced by a bank, such as Alfa-Bank, acting as an intermediary, either for Russian exporters or individuals, or for other parties in Russia which receive FX cash flows from abroad

DPRs are made up of the following forms of payment orders generated through the SWIFT payment system: Customer payments (MT100 series) Bank to bank transfers (MT200 series) Collections and cash letters, including “cash against documents” export transactions

(MT400 series) Documentary credits and guarantees, including “letter of credit” export transactions

(MT700 series) Travellers’ cheques (MT800 series)

What are Diversified Payment Rights?

Remitting Entities(Individuals, Corporates)

Remitters’ Bank (Outside Russia)

Local Beneficiaries

Offshore Russia

PaymentInstruction

On PaymentIrrevocablePayment Obligation

Generally only Swift MT100 and MT200 payment orders are included in a DPR transaction

4


DPR Issuance – the Players Turkish banks have been the largest users of DPR securitisation with more than US$9.8 billion in total issuance, followed by

Brazil with US$4.1 billion

Most financial transactions included as collateral have been commercial in nature (trade/export related or foreign direct investment)

Exceptions are the Brazilian, Salvadorian and Turkish DPR securitisations, which have a high percentage of worker remittances

In March 2006, Alfa-Bank closed the first ever DPR securitisation to date in Russia – rated 2 notches higher than the unsecured debt rating (Baa3 vs. Ba2)

The first capital markets funded DPR securitisation in Kazakhstan was closed in 2005 by Kazkommertsbank

DPR Issuance

1995-2006YTD (US$m)

DPR Securitisation – Market Overview

DPR Transactions to DateRussia / Kazakhstan

DPR I ssuance Russia and Kazakhstan to date

Volume (US$m)

Russia Russia International Card Finance 225 Russia International Card Finance (Tap) 70 Alfa DPR Finance Co. 350 Kazakhstan Kazkomerts DPR Co. 300

5

DPR Securitisation Structure

Alfa-Bank’s Correspondent Banks

Offshore Russia

Alfa-BankAlfa-Bank

SenderSender Sender’s Bank Sender’s Bank

SenderSenderBeneficiaryBeneficiary

Processing and Financing of DPRs


Payment Flow Process

1. A Sender directs a payment order to a Beneficiary in Russia

2. The Sender of the payment order directs its bank of choice (the “Sender’s Bank”) to remit a payment to an account of the Beneficiary, who holds an account with Alfa-Bank

3. Alfa-Bank holds USD and EUR nostro accounts with several international Correspondent Banks

4. The Sender’s Bank issues a Payment Order to Alfa-Bank in Russia for credit of the Beneficiary

5. If the Sender’s Bank is not one of Alfa-Bank's Correspondent Banks then it will forward this Payment Order to a Correspondent Bank of Alfa-Bank. This Bank will then issue the Payment Order to Alfa-Bank via SWIFT

Bank ABank A

Bank BBank B

Bank CBank C

Bank DBank D

6

3

2

Offshore Russia

SPVCollection

Account

SPVCollection

Account

Note InvestorsNote Investors

Alfa-BankAlfa-Bank

Notes Note proceeds

Note proceeds

Pledge of DPRs

1

Transaction Structure


Transaction Summary Initial Flow of Funds Alfa-Bank pledges the DPRs via a

secured loan agreement to an SPV in a tax neutral jurisdiction

The SPV funds the loan secured by the DPRs via a note issuance in the international capital markets

Exporters trade as normal with importers who make SWIFT payments to the designated correspondent banks (the “Correspondent Banks”) of Alfa-Bank

Alfa-Bank instructs approximately five to eight Correspondent Banks to redirect USD and EUR payment flows to the SPV

The SPV traps sufficient cash to meet the next debt service under the Notes

1. The SPV sells Notes to investors for a consideration of US$x million

2. The SPV pays US$x million to Alfa-Bank as a loan secured by existing and future DPR flows pledged or sold under the Factoring Agreement

3. Alfa-Bank pledges to the SPV all its rights, title and interest in and to all DPR payment rights

7

Offshore Russia

SPVCollateral Account

SPVCollateral Account

Note InvestorsNote Investors

CorrespondentBanks

CorrespondentBanks

SenderSender Sender’s Bank Sender’s Bank

SenderSender

BeneficiariesBeneficiaries

Alfa-BankAlfa-Bank

Instructions to remitpayments to SPV

Excess funds

Payments

USD/EUR paymentsUSD/EUR payments

Debt service

1 2

3

4

5

Processing and Financing of DPRs


1. Senders instruct their foreign Correspondent Banks to remit payments to beneficiaries in Russia, either directly or via the Sender’s Bank2. Alfa-Bank’s Correspondent Banks send Payment Orders to Alfa-Bank via SWIFT and deposit the funds into Alfa-Bank’s nostro accounts at

these Banks. Funds are periodically transferred to a Collateral Account of the SPV3. Funds from the Collateral Account are used by the SPV to meet debt service payments under the Notes (interest and principal)4. Once the SPV has sufficient funds in the Collateral Account to cover the debt service for the next payment period, the excess funds are

transferred to Alfa-Bank5. Alfa-Bank continues to service the Payment Orders to its clients in Russia

Ongoing Flow of Funds

8

Alfa-Bank Transaction Summary

Alfa-Bank US$350m Series 2006-A Issuance Backed by DPRs


Summary Terms and Conditions

Issuer: Alfa Diversified Payment Rights Finance Company S.A.

Originator: Open Joint-Stock Company “Alfa-Bank”

Transaction Type: Series 2006-A Notes issued under Alfa-Bank’s newly established multi-issuance DPR Programme

Credit Priority:Senior secured, ranking pari passu with all other issues off the programme in the future

Format: Reg S/144A (Alfa’s first ever 144A issuance)

Structure Rating: Baa3 (Moody’s) (two notches above Alfa’s Ba2 unsecured rating

Nominal Amount: US$350,000,000

Amortisation Schedule: 20 equal payments

Pricing Date: 27 March 2006

Final Maturity Date: 15 March 2011

Average Life: 2.5 years

Coupon: 3m US$ Libor + 160 bps (quarterly)

Issue/Re-offer Price: 100.000%

Re-offer Spread: 3m US$ Libor + 160 bps per annum

9

Alfa-Bank US$350m Series 2006-A Issuance Backed by DPRs


The issue attracted a high quality order book with broad geographic distribution and strong participation from many premier Emerging Market asset managers and insurance companies, a very significant number of accounts

The 57% participation of US investors is one of the highest ever penetrations of the US investor base for a Russian transaction under 144A, this is all the more notable as the deal was Alfa-Bank's debut deal under 144A

Geographic DistributionHighlights

Geographic DistributionHighlights

33%

32%

14%

10%

11%

Investment Manager Insurance / Pension

Finance/Credit Co. Bank

Other

16%

18%

28%

38%

$0-$10m $10-20m 20-30m $30m+

57%23%

5%

15%

USA UK Austria Other

10

Designated Depositary Banks (“DDBs”)


DPRs are paid by the sender’s banks into accounts at Alfa-Bank’s Depositary Banks outside of Russia

Depositary Banks that have signed Account Agreements are known as Designated Depositary Banks (“DDBs”)

Payments into accounts held at DDBs are controlled by the Trustee (JP Morgan Chase Bank in this transaction)

Alfa-Bank has signed Account Agreements with four of its top US$ Depositary Banks

89.96% of the DPRs received by Alfa-Bank in 2005 flowed through the four DDBs:

Ratings 2005 DPR Flows (in US$)

Designated Depositary Bank

69.14% 9,750,625,436Aa3 / A+ / A+ (pos)JP Morgan Chase Bank, New York

12.18%1,718,057,446Aa3 / AA- / AA-Deutsche Bank Trust Co. Americas, New York

4.56%643,582,162Aa2 (pos)/ A+ (pos) / AA-HSBC Bank USA, New York

4.07%574,021,537Aa3 / A+ / AA-Bank of New York, New York

10.04%1,416,516,850Others

100.0% 14,102,803,431Collections

89.96%12,686,286,581Total – Designated Banks

11

Structural Features Protecting Investors

Comprehensive Mitigation of Risk – Early Amortisation Events


Receivables

Collection Risk

Quarterly and monthly Debt Service Coverage Tests for DPRs to identify low or declining DPR flow scenarios

For any quarterly period, minimum of 60% of Collections must go through Designated Depositary Banks

The debt Service Coverage Tests are based on Collections of flows through the Designated Depositary Banks

A breach of any one or more of these will result in early amortisation or early repayment of the Series 2006-A Notes

Originator Risk

Events such as breaches of covenants (including the covenant to continue to maintain the DPR processing businesses) or representations, as well as sovereign interference are defaults (resulting in a mandatory repurchase requirement of the Series 2006 A Notes through recourse to Alfa-Bank

Alfa-Bank covenants to continue in DPR business

Payment Risk Monthly and quarterly servicer reports provided to J P Morgan Chase Bank N.A. as Indenture Trustee by Alfa-Bank

12

Triggers Provide Further Security for Investors

Test


Debt Service Cover

Ratio Test

Monthly DSCR is less than 11.5:1x

Quarterly DSCR is less than 17.5:1x

Decline in

Flows Test

Amounts of collections for two consecutive Quarterly Reporting Periods are less than 60% of flows for the comparable time period in the prior year (any single DPR > US$20m equivalent is excluded from the test calculation); AND

DSCR for the Quarterly Reporting Period is less than 12x in each of these Quarterly Reporting Periods

Early Amortisation of the Notes will be triggered in the event of the following

13

Further Tests and Covenants

Other Structural Features


Default Event –

Designated

Depository Bank

Collections Test

I f less than 50% of Collections received during any Quarterly Reporting Period have been deposited into the Collection Accounts at Designated Depository Banks this will constitute a “Default Event”

A breach of such a covenant would require Alfa-Bank to redeem the financings under the programme in full

Default Event –

Risk based CAR

Requirement

Covenants

Alfa-Bank is required to maintain a minimum non-consolidated capital adequacy ratio in accordance with Russian banking regulations (currently 10%)

I f Alfa-Bank is conducting business in more than one jurisdiction, the total capital ratio shall not fall below the minimum ratio required by the relevant banking supervisory authority in such other jurisdictions

A breach of such a covenant would required Alfa-Bank to redeem the financings under the programme in full

Ratings Downgrade

Trigger

I f Alfa-Bank’s Moody’s local currency deposit rating falls to Ba3 or lower (currently at Ba2), this is an early amortisation event

14

Actual Debt Service Coverage Ratios

50x

100x

150x

200x

250x

300x

Jan-05 Mar-05 Jun-05 Sep-05 Dec-05

All Flows

These numbers are calculated using Alfa-Bank’s 2005 DPR flows and assuming a US$350m note issuance


Quarterly Debt Service Coverage RatioMonthly Debt Service Coverage Ratio

100x

125x

150x

175x

200x

Jan-05 Mar-05 Jun-05 Sep-05 Dec-05

All Flows

15

Transaction Documents

Future Flow Securitisation Allows the issuer to sell multiple series of debt certificates from the same assets. All series share the credit risks and cash flows from a single large pool of Receivables

Offers potential for an ongoing programme of financing, as funding needs dictate, and access to a variety of investors, maturities and currencies on both a strategic and opportunistic basis

Allows more flexibility for the issuer to tailor the credit and repayment profile of the issued securities

Despite slightly higher initial costs, offers the ability to transact more cost effective future flow securitisations on an ongoing basis

Different series can have different tenors and amortisation schedules

Notes can be issued in multiple currencies (e.g., U.S. Dollars, Yen, Euros, etc.)

Notes can bear either a fixed or floating interest rate

Notes can be “enhanced” (e.g., supported by a financial guarantee) or “unwrapped” (e.g., not supported by a financial guarantee)

Notes can be offered to investors in several ways (e.g., registered with the SEC, 144A or “pure” private placement)

Transaction Documents

“Programme Structure” Provides Flexibility and Cost-Savings

Secured Loan Agreement

Secured Loan Supplement(s)

Pledge Agreement

Indenture

Indenture Supplement(s)

Account Agreements

The primary documents used in a secured loan structure are:

16

Why Use Future Flow Securitisation?

Advantages

Why Use Future Flow Securitisation?

Lower cost of funding

Execution stability in more difficult markets

Higher rated than senior unsecured debt

Alternative/diversification of funding sources

Ability to attract monoline guarantors, subject to ratings

17

Lessons Learned Distribution strength is key – choose the Arranger well

Ability to negotiate & structure with Rating Agencies is crucial

Investors are willing to understand and accept new structures from Russia

True sale vs. pledge of assets – tax implications

Merrill Lynch – The Leader in Russia & CIS Securitisation

18

[US$430m] in execution

Due March 2012

MDM Auto Loan

October 2006

Russia’s first 144A Auto Loan Securitisation

US$300m

Due September 2009

Rosbank

November 2004/January 2005

Russia’s first ever Bank securitisation

US$1,250m

Due February 2020

Gazprom

July 2004

Russia’s first StructuredExport Notes transaction

US$350m

Due March 2011

Alfa Bank

March 2006

Russia’s first DPR securitisation

Disclaimer

Merrill Lynch prohibits (a) employees from, directly or indirectly, offering a favorable research rating or specific price target, or offering to change such rating or price target, as consideration or inducement for the receipt of business or for compensation, and (b) Research Analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investor clients.

This proposal is confidential, for your private use only, and may not be shared with others (other than your advisors) without Merrill Lynch's written permission, except that you (and each of your employees, representatives or other agents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the proposal and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and tax structure. For purposes of the preceding sentence, tax refers to U.S. federal and state tax. This proposal is for discussion purposes only. Merrill Lynch is not an expert on, and does not render opinions regarding, legal, accounting, regulatory or tax matters. You should consult with your advisors concerning these matters before undertaking the proposed transaction.