RSF 2

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25644
Company name	Russian Banks
Country	Russian Federation
Sector	Finance & Insurance
Environmental category	C
Department	Global Financial Markets Group
Status	Pending Signing

Date SPI disclosed	December 11, 2006
Projected board date	January 25, 2007
Previous Events	Approved: February 1, 2007

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The proposed project is a three-year up to $200 million facility (the Facility) to support the development of the securitization market in Russia. The Facility will be used to provide credit enhancement to SPVs created by financial institutions eligible to receive IFC’s funding by one or a combination of the following:

- purchasing mezzanine or junior class securities in securitization,
- providing Partial Credit Guarantees (PCG) on senior class securities in securitization, or
- providing guarantees of off-shore liquidity facilities for transfer and convertibility risks.

The Facility follows on IFC’s two successful securitization transactions with Russian clients which closed during the first half of 2006 (Russian Standard Bank and Vneshtorgbank) and RSF 1, under which, the first transaction closed in November 2006. Through IFC’s work on these transactions so far, it has become apparent that although the use of securitization transactions in Russia is at an early stage of development, there is a significant demand for these transactions from various financial institutions that:

- face capital constraints due to rapid asset growth,
- need to manage their capital more efficiently, or
- have difficulty attracting long-term funding at acceptable pricing.

This trend is expected to continue in coming years, as growing consumer wealth and understanding of lending products fuel demand for loans for the purchase of consumer goods, autos, and homes. These consumer loan assets are prime instruments for bundling and sale to investors in tranched structures targeted to meet the credit risk profile of various investor groups. In addition, the Facility is also expected to be used for the securitization of SME loans and other similar financing instruments that lend themselves easily to such structures.

Anticipated development impact of the project

Although Russian securitizations so far have been placed cross-border using foreign legal jurisdictions to protect elements not currently covered by Russian law, it is expected that Russia will adopt internationally accepted laws and regulations so that securitization transactions can be done at home and a domestic market can develop. Work is underway to create this framework. In the meantime, cross-border transactions can help lay the foundation for a domestic market to build product knowledge, operations, documentation, underlying asset structures, etc. The impact of the project can be even broader given the strong connection that exists in Russia between the development of the capital markets and the development of the banking sector. That is, with an effective market refinancing instrument such as securitization, the financial sector’s ability to meet the demand for retail and housing finance (and, potentially, certain types of SME finance) can be enhanced.

IFC's expected development contribution

IFC’s role is to:

- support a series of innovative transactions helping demonstrate the viability of well-structured securitizations by Russian financial institutions;
- promote the adoption of capital market standards by Russian financial institutions, including adoption of “best practice” credit scoring techniques and the use of ratings, and increasing the level of transparency and disclosure to attract the broadest possible group of investors;
- provide various forms of credit enhancement to enable individual transactions to achieve targeted credit ratings and placement of the notes; and
-leverage IFC’s experience in structured finance transactions in emerging markets to assist clients in Russia in completing successful securitizations by disseminating state-of-the-art financial engineering techniques.

Environmental and social issues - Category C

This project is being set up for securitization of receivables from predominantly retail transactions and has been classified as a Category C project according to IFC’s Environmental and Social Review Procedure. No further review is required. The project is required to inform IFC in the event of any change in business that could affect the social and environmental risks of the portfolio and commit to meeting any requirements that may arise with such a change.

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