Fitch: Servicing Concerns of Kazakh MBS Expose Risks in EMEA SF
April 26, 2010 Fitch Ratings
Fitch Ratings-London-26 April 2010: Fitch Ratings says in a special comment today that the servicing issues affecting the Kazakh Mortgage Backed Securities 2007-1 B.V. (Kazakh MBS) transaction, particularly relating to the invocation of the stand-by servicing agreement, may not be limited to emerging markets transactions and expose operational and potential credit risks inherent in EMEA structured finance (SF) transactions.
"The trustee's reluctance to transfer servicing to the stand-by servicer in the Kazakh MBS deal and the back-up servicer's attempts to renege on its obligations are not particularly surprising or unique, as the migration of any servicing portfolio from one entity to another involves risks that are further exacerbated when the involved parties are resistant to such action," says Edward Register, Senior Director, EMEA Structured Finance Operational Risk Group at Fitch.
From the trustee's perspective, maintaining the servicing of Kazakh MBS with BTA Ipoteka (BTAI), a subsidiary of Kazakhstan's second-largest bank, BTA Bank (Restricted Default), is preferable to initiating a transfer to an unwilling back-up servicer such as Halyk Bank of Kazakhstan (rated 'B+'/Stable'B'), particularly given the type of loans in the portfolio which Halyk claims it cannot service.
Fitch believes such issues to be minimal in more advanced economies with well-developed mortgage markets and sophisticated servicing environments. However, while there are some transactions in EMEA markets where the stand-by servicer has a right of refusal following invocation of the stand-by arrangement, such a provision does not exist for Halyk.
Fitch believes that should the trustee in the Kazakh MBS example have to enforce the stand-by agreement, Halyk would be contractually obligated to assume the servicing role or face potential legal action. Such action would likely involve noteholders, particularly if a prolonged servicing disruption significantly impacted transaction performance.
"Fitch views back-up servicing arrangements as an appropriate mitigant to servicing disruption events triggered by a servicer default. However, to fully capitalise on the stand-by arrangement, the agreement needs to be legally binding and the back-up servicer needs to be able to effectively service the types of loans included in the relevant transaction," adds Register.
The full special comment, entitled "Servicing Concerns of Kazakh Mortgage-backed Securities Expose Risks in EMEA Structured Finance", is available at www.fitchratings.com. It discusses the operational issues affecting the Kazakhstan RMBS transaction and how these concerns may not be limited to emerging markets SF transactions.
For additional information on servicing risks in SF transactions, see the criteria reports entitled "Servicing Continuity Risk Criteria for Structured Finance Transactions", dated 17 March 2010, and "Global Rating Criteria for Structured Finance Servicers", dated 30 September 2009, which are also available at www.fitchratings.com.
Issue — BTA Hypothec, 2029-A (RMBS, FRN)
Country of riskKazakhstan
Redemption (put/call option)
М/S&P/F— / — / —