Wasif Kazi, structurer at UniCredit, forecasts continued growth and steady state expansion for Central and Eastern European (CEE) SRT activity

Q: Given that 2022 was widely viewed as a breakthrough year in terms of CEE capital relief trade issuance, is the Polish market still a trend to monitor, or is it becoming an established jurisdiction for SRT transactions?
A: I would say it's somewhere in between the two. We see more transactions each year coming out of Poland. We see repeat transactions from issuers that have already issued and we're also aware of several new transactions in the pipeline.

I think it's close to becoming something that most banks have now either in scope or already in their toolkit, in terms of capital management instruments. And, on the other side, we’re seeing increasing familiarity from market investors.

Q: What makes Poland an attractive jurisdiction and prospect for SRT transactions?
A: We've been active in the Polish market for close to eight years now, originally focusing on the true sale side. Our assessment was always that Polish banks have very strong risk management systems.

Additionally, their portfolios are well-constructed, well-managed and perform over the lifecycle. Moreover, until now, investors haven't really had the opportunity to get access to those portfolios via securitisation.

In conclusion, it is a well-run banking sector with strong institutions. And then within those institutions, there is a very meticulous diligence culture, in terms of the management of risk. That means that you have a lot of attractive portfolios from a securitisation perspective, with long and well-put together data, as well as solid underwriting practices.

Q: Are you witnessing increased activity in the broader CEE region?
A: Given the private nature of the SRT market, one of the challenges is actually to keep an eye on what is going on outside of our own remit. It is fair to say that more is happening in CEE securitisation than people generally realise. A far as I can see, virtually every jurisdiction has had at least one transaction now.

Obviously, with synthetic transactions, you take away the legal and tax challenges that you have with cash deals. So synthetic becomes a focused question about the portfolio and the economics of the capital structure. Given that a flag has been planted from an SRT perspective in more or less every jurisdiction, obviously you see this kind of follow-on effect.

By way of example, we undertook the first Bulgarian transaction for UniCredit Bulbank (SCI 19 October 2022). Local regulators soon find a level of comfort and a local ecosystem forms in terms of legal, tax and capital advisors, for example, who can also analyse transactions.

We feel Poland will remain the most active jurisdiction, given the volume of deals that have already been done there, but we see growth in all these markets. It will most likely be a gradual process, whereby one or two new participants come into each jurisdiction every year and there is a steady build-up over time, rather than a big surge.

Q: Is there, for now, still a clear dominance by international financial institutions (IFIs) and the likes of the EIF and EBRD as investors? Are they still the most cost-effective option in the region?
A: I would say so, generally. In Poland, we've had the pleasure and the privilege to help drive forward the expansion of the product from the IFI space into the private investor space. But we always say, both products work very well in the right context.

For the first transaction based on a granular SME portfolio, with capacity on the redeployment side - which is obviously a key factor in an IFI deal - those deals make a lot of sense. For larger corporates or large mid-corporates (being more concentrated portfolios) or different asset classes and/or where the institution doesn't have the same capital redeployment targets in mind, then the private investor market also makes a lot of sense. So, we would see the two developing in parallel, but - as you say - probably with the IFIs in the lead in newer jurisdictions.

Q: Are unfunded deals – with less explicit currency risk – more suitable for CEE jurisdictions?
A: We haven't seen a constraint in Poland in terms of currency. Now, maybe with smaller jurisdictions with less liquid currencies than the Zloty, the unfunded structure does make more sense.

But ultimately, you're still writing protection in the currency of the portfolio. Therefore, whether it's funded or unfunded, there is ultimately still the same underlying currency to be managed.

It will be interesting to see how the market develops for some of these currencies. But, of course, for a lot of these jurisdictions, there are still portfolios in euros which can also be used.

Q: Looking at asset classes, are you seeing an expansion away from the core SME corporate portfolios?
A: I think that in Poland we are. In Poland, we've seen, for example, in addition to corporate SMEs, trades referencing consumer loan and corporate leasing portfolios.

One of the factors is that there seems to be, in a lot of jurisdictions, a high percentage of corporate and SME loans that are the beneficiary of development bank or local state, quasi-state guarantees, particularly arising during Covid times. So, as long as that's one of the characteristics of the portfolios, it can constrain available corporate portfolio volumes. However, given that most institutions are just starting this process in the region, we would still expect corporate SME to be the lion's share of the first few deals from these such issuers.

Q: Finally, what is your outlook for 2024?
A: We foresee continued growth and steady state expansion. We don’t expect to see a big step-change between 2023 and 2024, but rather an accretive process over time of new originators coming in and benefiting from the product, and repeat issuance from existing market participants.

The product makes a lot of sense and there are certain developments in the market which benefit the region. Generally, one would expect to find more standardised banks in CEE, and the market has learned how to structure and manage these portfolios well over the last few years - which should, in turn, translate into efficient transactions. To conclude, we expect an increasing run rate of CEE deals in the coming years.

Vincent Nadeau