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Emerging Markets Structured FinanceOutlook: New Jurisdictions, AssetClasses, And Structures Are On DeckFor 2014

Primary Credit Analysts:

Eric Gretch, New York (1) 212-438-6791; [email protected]

Irina A Penkina, Moscow (7) 495-783-4070; [email protected]

Leandro C Albuquerque, Sao Paulo (55) 11-3039-9729; [email protected]

Mauricio Tello, Mexico City (52) 55-5081-4446; [email protected]

Sol Ventura, Buenos Aires (54) 114-891-2114; [email protected]

Omri Stern, Tel Aviv (972) 3-753-9725; [email protected]

Aaron Lei, Taipei (8862) 8722-5852; [email protected]

Toshihiro Matsuo, Tokyo (81) 3-4550-8225; [email protected]

Virginie Couchet, Madrid (34) 91-389-6959; [email protected]

Lead Analytical Managers:

Juan P De Mollein, London (1) 212-438-2536; [email protected]

Vera Chaplin, Melbourne (61) 3-9631-2058; [email protected]

Arthur F Simonson, New York (1) 212-438-2094; [email protected]

Table Of Contents

Mexico: ABS Will Take The Driver's Seat

Securitization In Brazil Is Poised For Healthier Growth Despite Economic

Uncertainty

ABS Still Dominates Argentina's Local Securitization Market

Colombia And Peru: Positive Economic Developments Could Foster A

Stronger Securitization Market

Chile: Cross-Border ABS Transactions Should Increase In 2014

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 12, 2014 1

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Table Of Contents (cont.)

Central America: New Transactions Could Bolster Performance

RMBS Still Dominates Russia's Securitization Market, But ABS Is On The

Rise

Sub-Saharan Africa: Economic Growth Is Expected, But Most Structured

Finance Activity Will Remain In South Africa

Israel: Regulatory Uncertainty Is Still A Constraint Despite Increasing

Demand

Turkey: Banks May Turn To Securitization In The Face Of A Slowing

Economy

Islamic Finance: Structured Finance Deals Should Increase Following

IILM's New Certificate Program

South Korea: Cross-Border Structured Finance Transactions Have Been

Limited, But Covered Bond Issuance Could Rise In 2014

China: Government Initiatives May Accelerate Securitization Market

Development In Coming Years

Taiwan: Limited Asset Spreads Will Constrain New Issuance In 2014

Structured Finance Will Expand Across The Emerging Markets In 2014 As

New Asset Types And Better Securitization Frameworks Evolve

Related Criteria And Research


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Emerging Markets Structured Finance Outlook:New Jurisdictions, Asset Classes, And StructuresAre On Deck For 2014

Standard & Poor's Ratings Services anticipates a proliferation of structured finance technology throughout the

emerging markets in 2014 characterized by new jurisdictions, asset classes, and structures. We believe expanding

domestic markets will continue to dominate the emerging markets landscape in 2014 within the largest

investment-grade countries, since cross-border issuances have offered little cost savings for issuers, especially for

non-deliverable currencies (currencies that are not tradable outside of their respective country). On the other hand, we

expect issuers in speculative-grade countries to continue seeking cross-border funding with future flow and repack

structures. In addition, we believe that regulatory risk will play a smaller role throughout the year as developing legal

and financial frameworks begin to favor more complicated financing arrangements.

In Latin America, perennial leaders Mexico and Brazil will lead the charge in issuance volumes, while the Asia Pacific

(APAC) emerging markets will likely see more activity from South Korea and China, with greater potential coming

from Taiwan. Across Eastern Europe, the Middle East, and Africa (EEMEA), we expect issuance volumes will benefit

from a widely anticipated Russian domestic securitization law, growing consumer demand in sub-Saharan Africa, and

new opportunities in Turkey and the Middle East as they expand their structured finance footprint.

We believe that yield-seeking investors will again drive demand for structured finance products in the current low

interest rate environment. Also, investors may seek to diversify their portfolios with well-known products from new

frontier markets, which has partly accounted for the expansion of consumer loans across the EEMEA region and auto

loans in Latin America. However, like Islamic Liquidity Management Corp.'s (IILM's) new certificate program

discussed below, the versatility of structured finance techniques will continue to be exploited to address investor needs

around the world.

Overview

• Regulatory reform across the emerging markets is expected to encourage more securitization in 2014.

• There will be increased domestic activity in investment-grade countries while issuers in non-investment-grade

countries will seek out cross-border transactions.

• Synthetic structures will continue to play a role in providing tradable instruments with unique exposures to

domestic entities.

• Latin American new issuance will benefit from a rebounding Mexican economy while investors in Brazil will

seek additional security amid economic uncertainty.

• In EEMEA, a new Russian securitization law should encourage growth in the asset-backed securities (ABS)

market while pending reform in Israel will likely stymie transaction volumes in 2014.

• Chinese initiatives are expected to encourage securitization growth this year while Korean covered bond

legislation will boost new issuance in APAC.


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Mexico: ABS Will Take The Driver's Seat

Recent landmark energy reform coupled with changes to the fiscal framework should support the government's

infrastructure spending program, thereby driving GDP growth in 2014 (see "Mexico Long-Term Foreign Currency

Rating Raised To 'BBB+', Local Currency Rating Raised To 'A'; Outlook Is Stable," Dec. 19. 2013). This could

encourage a more vibrant structured finance market, given the increased funding needs by companies and originators

after an already-strong fourth quarter in 2013. We believe that new transactions could grow in number between 10%

and 20% in 2014, while volume may increase at a slightly slower pace as new and smaller originators enter the market.

Issuance in 2013 showed a year-over-year growth of 12.4%, excluding financing to Mexican states and municipalities.

As we anticipated, transaction volume picked up in 2013 after remaining stagnant for two years, reaching MXN48.98

billion vs. 2012's MXN43.6 billion (see chart 1). This was despite last year's weak economic performance, as GDP

growth fell short of our expectations for 2013, reaching an estimated 1.2% from the initial 3.5% we expected at the

beginning of the year. However, a more active economy will mean higher funding needs, which should support a

modest increase in issuance in 2014, especially if labor market conditions remain stable.

Chart 1


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Emerging Markets Structured Finance Outlook: New Jurisdictions, Asset Classes, And Structures Are On Deck For2014

In terms of issuance trends for Mexico, we anticipate that ABS consisting of auto and equipment leases and

commercial trade receivables will continue growing as their solid performance history fuels investor appetite. In

addition, new private sector consumer finance deals will come to market, mainly comprising unsecured

payroll-deductible loans. Additionally, some micro-lending ABS deals could also be placed this year. Commercial

future flow securitizations will become more important, and we expect to see additional transactions from repeat and

new participants in 2014. Partial-credit guarantee-enhanced issuances will also continue (see "New Structured Finance

Opportunities Will Push The Boundaries For Securitization Across Latin America In 2014," published Jan. 30, 2014, for

more information).

RMBS will still remain the largest asset class by issuance amount

The warm reception new issuers received by the market in 2013 should encourage additional entrants in 2014. Similar

to last year, we expect the largest asset class, by number of deals, to be ABS of auto and equipment leases, which

surpassed residential mortgage-backed securities (RMBS) in number of deals. However, RMBS remained the largest by

issuance amount (see charts 2 and 3) because average deal sizes are bigger.

Chart 2


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Chart 3

As we had anticipated, one retail bank, BBVA Bancomer, returned to the structured finance market, making it the first

private originator to do so since 2009. For 2014, we expect a couple of private RMBS originators to tap the market,

and government-related housing institutions Instituto del Fondo Nacional de la Vivienda para los Trabajadores

(Infonavit) and Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado

(Fovissste) to place two or three new transactions each. This would bring the RMBS issuance amount close to 2013's

MXN30.26 billion (around US$2.37 billion).

Securitization In Brazil Is Poised For Healthier Growth Despite EconomicUncertainty

Amid a scenario of weakened GDP growth and more economic uncertainty in Brazil, domestic fixed-income investors

may turn towards structured financings that offer a combination of greater security (than senior unsecured issuances)

and higher returns. Additionally, demand will be driven by more robust structures and increased transparency resulting

from both recent regulatory reform aimed at mitigating the operational risks of FIDCs and the lessons learned after

Bancos Cruzeiro do Sul, Banco BVA, and Banco Rural were liquidated.


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In our view, the biggest obstacles faced by securitizations backed by assets from Banco Cruzeiro do Sul and BVA were

mitigated by the updated regulation, which addresses commingling risk, the transfer of responsibility on physical

documents from the seller to the custodian agent, and enhanced mechanisms to verify a transaction's asset pool.

Although, the regulation substantially mitigates these risks, in some cases, it does not fully eliminate them.

On the credit quality side for consumer debt, we expect to see three movements under our base-case scenario (see

chart 4):

• Residential mortgages will keep gaining popularity, gradually leading to the emergence of an RMBS market in Brazil;

• Origination of payroll-deductible loans will continue migrating to large banks and, consequently, their securitization

will be solely opportunistic and limited; and

• Younger vintages of auto loans will perform better given new origination standards, which should encourage higher

levels of securitization issuance.

Chart 4

For commercial obligations, including the corporate middle market, we expect that the exit of some players, such as

Banco Rural and Banco BVA, and the reduction and risk aversion of remaining market participants may stimulate

collateralized loan obligation (CLO) issuance. Under such arrangements, securitization vehicles could be a source of

funding to non-investment-grade corporations, replacing banks that want to reduce their exposure. Additionally, the


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reluctance from banks to lend to the middle market sector could force corporations to leverage their trade receivables

portfolios, increasing issuance volumes of new FIDCs backed by such assets. For small and midsize enterprises, we

again expect performance to deteriorate, though we do not expect a uniform movement across the industry. In fact,

some collateral managers may take advantage of typical lenders' more conservative approach to improve their

portfolios' overall credit quality.

Overall, we expect that the issuance volume of domestic securitizations will increase in 2014 and potentially become a

more common source of funding for banks and corporations. Therefore, under our base case, we expect issuance

growth between 15% and 25%.

ABS Still Dominates Argentina's Local Securitization Market

The Argentine securitization market will remain primarily local in 2014 with ABS leading new issuance (see chart 5).

ABS transactions will be predominantly backed by consumer loans originated by white good retailers and personal

loans originated by financial institutions and cooperatives. Credit card receivables from regional credit card companies

are the third major securitized asset in Argentina, and they will slowly start to gain market participation in 2014. Also,

we are expecting an increase in trade receivables issuance during first-quarter 2014, thanks to agriculture-related

companies that require funding during the first quarter.

Given that the mature Argentine structured finance market has been around for more than 17 years, we expect few

new issuers to tap into it this year. Also, we don't project new future flow issuance since transaction ratings are linked

to that of lower-rated corporations, resulting from the lack of a true sale. Additionally, auto loan origination might

decrease as new taxes are imposed on certain new vehicles.


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Chart 5

Economic conditions may affect consumers' payment abilities

During 2013, rating actions were driven mainly by originator failures, which increased operational risk. But overall,

performance on Argentine securitizations remained within our initial projections: stable, with slight deterioration

towards year-end.

We expect Argentina's real GDP to grow moderately at about 2.5% over the next two years, although the risks to this

projection are on the downside. The country's economy remains limited by distortionary economic policies that keep

inflation high, which affects consumers' payment capacity. We expected inflation by the end of 2013 to be

approximately 27% and remain at similar high levels during 2014.

As in past years, during 2014 local securitization performance will continue to be tightly linked to Argentina's

economy. For example, if salary growth does not keep pace with inflation, this might impair debtors' capacity to pay.

Nevertheless, local securitizations have strong credit enhancement levels to mitigate potential loss increases, keeping

ratings volatility low.

For unsecured personal loans whose installments are directly deducted from salaries or pensions, we project stable

performance except for the credits where deductions are made from the debtor's current account (through Clave

Bancaria Única [CBU]), as they are riskier. This is especially true for debtors whose salaries were higher by the end of


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2013 because of agreements between provincial governments and public workers unions, as those individuals will

have a larger payment capacity. For unsecured personal loans with voluntary payments, originators will have to

tighten their origination and collection policies to avoid worsening performance. In the case of credit card receivables,

we project stable performance given their short-term nature.

Colombia And Peru: Positive Economic Developments Could Foster A StrongerSecuritization Market

A decade of high economic growth in Peru has translated to increasing employment and purchasing power, which we

forecasted to continue with per capita GDP growth in the 5.5%-6.5% range for 2014-2015. A corresponding increase in

private consumption will likely further stimulate the consumer credit markets and encourage the emergence of ABS

products to complement the existing RMBS infrastructure. The cross-border Peruvian market was relatively inactive in

2013 despite continued stability in diversified payment rights (DPR) transactions and RMBS performance. We expect

positive transaction performance through 2014, allowing banks to opportunistically leverage their existing structured

finance programs.

Colombia's small local structured finance market revolves around RMBS. In 2013, new issuance decreased to just one

securitization for approximately US$222 million as opposed to a yearly average of four transactions. This decline was

related to the Colombian federal government ending tax incentives on these types of deals.

Last year, dual-recourse mortgage bonds returned to the Colombian market after almost seven years. These products

are similar to a covered bond, where the issuer is the primary source of repayment, while a mortgage pool also serves

as collateral. In this transaction, however, the mortgage pool backs the secondary source of repayment, which is a

guaranty by the Colombian government. In 2013, a real estate transaction was upsized by approximately US$95

million, the fourth such increase that brought total issuance to nearly $400 million. The underlying assets included a

mix of office buildings, warehouses, shopping centers, and other retail spaces.

Colombia's economy grew close to 4% in 2013 and is expected to post a similar figure this year. This positive trend

supports securitizations' future performance and is expected to foster its expansion in 2014 to new asset classes.

Nevertheless, the relatively high cost of securitizations will continue to be a challenge for the Colombian market

because banks have not yet found securitizations to be cost-effective.

Chile: Cross-Border ABS Transactions Should Increase In 2014

Last year marked a comeback to the cross-border market for Chilean securitizations. We assigned our 'BBB-' rating to

a new airline ticket receivables transaction, which was the first related to services provided by LATAM Airlines Group

S.A. (see "Presale: Guanay Finance Ltd. (Series 2013-1 $450 Million Senior Secured Notes)," published Oct. 22, 2013).

We expect more cross-border ABS transactions along these lines to be issued out of Chile in 2014.

Also, the first covered bonds were issued in 2013 under the updated legal framework, which provides banks with

further funding diversification. Given that Chilean law does not allow for overcollateralization, we would cap the


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ratings at the issuer's credit ratings. Nevertheless, we believe that the structure may provide additional liquidity to

banks as the framework assists in broadening their investor base.

Central America: New Transactions Could Bolster Performance

Panama's dormant yet sophisticated residential mortgage market witnessed some activity in 2013. After more than two

years since the last placement, a new RMBS transaction was placed in the local market in 2013 for US$45 million, with

the underlying collateral comprising residential mortgage loans in El Salvador. Historically, most securitizations have

been locally placed, with just a few cross-border transactions.

Last year also saw an upsize of the first structured covered bond transaction in Latin America for US$100 million,

bringing the total issuance amount to US$300 million. Standard & Poor's affirmed its 'BBB' rating on this transaction,

Global Bank Corp.'s residential mortgage loans covered bonds series 2012-1 (see "Global Bank Corp.'s 2012-1 Covered

Bond Notes 'BBB' Rating Affirmed After A US$100 Million Upsize," published Nov. 1, 2013). We expect this program to

be upsized again in 2014.

Guatemalan and Costa Rican securitizations continue to mainly be DPR and merchant voucher future flow

securitizations as local banks leverage U.S. dollars flows to access more favorable funding from the international

markets. We believe continued strong performance among existing future flow programs will continue to attract

investors to new transactions in 2014.

We recently raised our rating on Guatemala Electricity Trust's US$100 million 8.5% notes due 2014 to 'BB (sf)' from

'BB- (sf)' (see "Rating On Guatemala Electricity Trust's 2004 Notes Raised To 'BB (sf)'," published Oct. 10, 2013). The

transaction is a repackaging of a loan from Citibank to Empresa Electrica de Guatemala S.A. We expect companies to

leverage repack structures going forward as they increase the available investor base.

RMBS Still Dominates Russia's Securitization Market, But ABS Is On The Rise

A growing securitizable asset base will characterize the Russian RMBS market in 2014, but investor demand will wane

as one of two strategic investors exits the market. Overall, we anticipate that 2014 will end up close to 2013 in terms of

new RMBS issuance because the downside effect of Vnesheconombank (VEB) leaving the list of RMBS investors

(resulting from ongoing pension reform) won't be fully seen until 2015. On the other hand, the ABS market, which so

far has been almost nonexistent since the financial turbulence of 2008-2009, may gain a second wind starting in July

2014, when a new domestic securitization law goes into effect. The law will allow local special-purpose vehicles (SPVs)

to be established supporting all types of asset securitizations and project finance, a contrast to the current legal

framework that allows local SPVs to be created only for mortgage-backed securitizations.

In terms of new RMBS issuance, last year marked another year of record-high mortgage origination in Russia. Over the

first 10 months of 2013, the amount of originated residential mortgages totaled RUB1.06 trillion, a 30% increase

compared with the same period in 2012. New RMBS issuance (not including balance sheet securitization) reached

RUB94.5 billion, growing 75% since 2012. Since 2009, all Russian public RMBS issuances have been placed


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domestically (see chart 6).

Chart 6

In our view, mortgage issuance in Russia will keep expanding in 2014, thereby growing the base of securitizable

mortgage assets. However, ongoing modest increases in lending rates may eventually level out growth over time. The

amount of new RMBS placements will be most sensitive to domestic investor demand, which is largely concentrated in

the hands of two state-owned companies: VEB and the Agency for Housing Mortgage Lending (AHML). However,

VEB's recent departure is expected to significantly hit the market's ability to absorb new issuance as it has been an

anchor investor in most RMBS placements, especially the ones that midsize and smaller banks have issued. By the end

of 2013, VEB had accumulated a RUB30 billion portfolio of RMBS, representing one-fifth of total mortgaged-backed

notes issued in 2012 and 2013. On the positive side, VEB will continue investing in mortgage-backed notes that are

issued within the state program that supports both building affordable housing and developing the mortgage industry.

The program, which began in 2009, enables VEB to acquire RMBS meeting special program requirements totaling

RUB150 billion, of which VEB already used about RUB17 billion by year-end 2013. The program will terminate at the

end of 2014.

In addition to its role as investor, AHML also plays a key role in issuing Russian RMBS. Established in 1997, AHML is

the most active RMBS originator, with eight transactions closed to date totaling RUB85 billion, or 37% of total


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domestic RMBS issuance volume to date. The agency also offers guarantees on senior mortgage-backed notes, which

improves their liquidity, and it plans to invest in mezzanine RMBS notes, which would boost private investors'

confidence when acquiring senior tranches.

ABS activity should increase following new securitization laws

Unlike mortgage-backed securitization, which benefits from a legal framework, Russian law does not currently create a

favorable landscape for securitization of other asset types. This is why the Russian ABS market has been dormant since

2008; the domestic market lacked the legal infrastructure to replace the waning interest of cross-border investors.

The situation changed on Dec. 21, 2013, when the law "On Introduction of Amendments to Certain Legislative Acts of

the Russian Federation" No. 379-FZ ("the securitization law") was signed, introducing rules regulating the securitization

of various types of assets, including the establishment of SPVs. Along with the securitization law, certain amendments

were made to the existing laws regulating asset pledges. Both initiatives will come into effect starting July 1, 2014. If

the securitization law proves effective in enabling true sale securitization structures, we believe it will boost the

formation of a domestic ABS market in Russia. The most likely candidate for the new securitization law is unsecured

retail loans because their origination has been expanding markedly since 2010 (see chart 7). The outstanding amount

of loans to individuals (excluding mortgages) reached RUB9.7 trillion as of Dec. 1, 2013. The growth in unsecured

retail lending has decelerated-- to about 30% in 2013 from 42% in 2012--with regulators targeting 20%-25% growth for

2014. Banks still require funding to maintain the growth in retail loans and traditional funding lines such as customer

deposits aren't expanding fast enough to support them. The new law's ability to bolster the domestic ABS market will

largely depend on cost efficiency of securitization compared to unsecured bonds, including capital gain potential under

Russian accounting standards.


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Chart 7

In 2013, we rated structured notes issued by HC Finance LLC , which were backed by consumer loans originated by

Home Credit and Finance Bank LLC. The transaction features two SPVs: one in the Netherlands and another in Russia.

This was a successful example of addressing the deficiencies in Russian law, namely regarding SPVs and security

pledges, with the help of U.K. and Dutch law. Nevertheless, the structure's complexity compared with typical

securitizations increases the transactions' legal and operational risks, in our view (for more details, see "New Issue: HC

Finance LLC," published Nov. 28, 2013). Should the newly adopted securitization law enable simpler securitization

structures, this would benefit Russia's ABS market development.

Sub-Saharan Africa: Economic Growth Is Expected, But Most StructuredFinance Activity Will Remain In South Africa

Standard & Poor's expects stable economic growth across the sub-Saharan continent for 2014 on the back of

commodity exports and reasonably high levels of investment. Strong Chinese demand for natural resources has

supported the region's exports and inflows have helped bolster domestic demand. This has translated into increased

consumer spending and growth prospects. Nevertheless, for traditional structured financing, most activity still resides

in the South African market, where growth has been lackluster.


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Slow economic activity in South Africa resulted in further reductions in both domestic senior unsecured and structured

finance origination in 2013. Nevertheless, movement away from long-standing, more complicated structures toward

simpler, amortizing transactions for RMBS has increased cost savings vis-a-vis senior unsecured debt. As we

anticipated, both bank and nonbank financials employed structured finance techniques in 2013 as they sought to

diversify funding sources, while investors demonstrated a penchant for yield in lower-rated products backed by

unsecured consumer loans. Standard & Poor's assigned its first ratings to an ABS portfolio of unsecured consumer

loans in South Africa in the form of Bayport Securitisation (RF) Ltd. Despite the market's concerns over rapidly

expanding consumer credit, we believe that such issuers will continue to attract investor interest in 2014 as

underwriting policies strengthen.

Nevertheless, uncertainty on the regulatory front often leads investors, arrangers, and originators to take a

conservative stance toward securitization in South Africa. Regulation 28, which is part of the Pension Fund Act, limits

investment strategies for retirement funds, with securitization vehicles often interpreted as falling under other debt

instruments with a maximum exposure of 5% per issuer and 15% for all issuers. Additionally, Board Notice 80 is

similarly non-prescriptive in relation to purchasing structured products, thereby limiting exposures for such financings.

North of the border, we believe that issuers in commodity-rich sub-Saharan countries will continue to investigate the

cost savings from future flow transactions in accessing cross-border markets. Such transactions typically include

collateral related to remittance flows (i.e., from exports, foreign direct investment, and portfolio equity), commodity

producers, and infrastructure projects. These time-tested transactions boast a small yet dedicated investor base that

was heavily active in the commodity-rich yet speculative-grade landscape of Latin America in the 2000s.

Additionally, we foresee growth in repackaged securities as issuers look for alternative sources of capital, while

investors seek greater liquidity in the form of readily tradable securities. In traditional repack structures, an

intermediary lender is typically responsible for making the initial loan before a participation or assignment to an SPV.

In such cases, the initial lender, often a bank, provides a steady source of liquidity to the borrowing institution, thereby

affording it protection from negative movements in market sentiment. Also, repack structures allow intermediary

intuitions the flexibility of passing along the risk to third-party investors especially in light of internal concentration

limits. This is especially helpful in the emerging markets, whereby the largest names often represent a disproportionate

amount of the borrowing. The inability to participate out such risk can greatly reduce a bank's relevance in the market,

as it will restrict their lending capabilities. Furthermore, in many cases borrowers are unable to directly access the

capital markets because of either legal or regulatory restrictions. In BMW South Africa's Commissioner Street No. 5

(RF) Ltd. Top Drive Funding transaction, the borrower was restricted from issuing in the local market because they

were not a listed company in South Africa. In the case of the recent federal-guaranteed state issuances from Brazil, the

federal government restriction on states issuing directly in the capital markets led to the use of repack structures.

From an investor perspective, there is often a general reluctance to enter into direct lending with borrowers given the

limited liquidity for emerging markets debt, especially during volatile periods. A debt instrument (i.e repack structure)

on the other hand allows investors an escape mechanism while also providing a clear means of enforcement under

default scenarios because the trust is generally responsible for enforcing the decisions of the majority noteholders.


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Israel: Regulatory Uncertainty Is Still A Constraint Despite Increasing Demand

We expect regulatory changes, which began in 2012 and call for an increase in Tier 1 capital requirements in the

banking sector, to be the main impetus for structured finance growth in the Israeli market. However, transaction

volume continues to be depressed, hampered by the current lack of a clear regulatory framework for structured finance

deals.

A new "securitization law," which has been in development for several years, remains a work in progress. Until this law

is finalized, the uncertainty regarding the taxation of many structured deals including ABS, commercial

mortgage-backed securities (CMBS), and RMBS remains a key constraint to growth in this segment of the market. If

the new law passes during 2014, we believe that a clear set of ground rules would be in place and would allow

structured finance activity to significantly ramp up.

The Israeli market continues to be dominated by repackaged transactions, as they are not subject to the same tax

implications as other asset classes. Other structured credit products including collateralized debt obligations (CDOs)

could return to the market in 2014 as part of the Israel Securities Authority's efforts to increase trading volumes and

promote greater product diversity in the local capital market.

Over the past year, interest in structured finance products of all types including ABS and CMBS has increased among

both issuers and investors in Israel. This trend stems from a desire on the part of investors to diversify lending and

banks to diversify borrowing sources. In the near future, we expect to see transactions backed by trade receivables as

banks look to reduce exposure to large borrowers. Also, we envision further activity in the real estate space given the

cumbersome capital requirements for the banking sector.

Israel's oil and gas sector still offers significant potential in the medium term, on the heels of several sizable offshore

natural gas discoveries. Potential issuers in this segment are currently leveraging up for future production before the

fields become operational. We analyze these credit risks according to our project finance methodology. Once the fields

are fully operational, borrowers will have an opportunity to refinance project finance debt as future flows and other

types of structured transactions.

In our view, growth in Israel's structured market depends greatly on the completion of the securitization law,

specifically the establishment of a proper tax framework that would increase the efficiency of securitization. We

anticipate that regulators will act relatively swiftly to promote a solution, thus paving the way for a much more active

structured finance market in Israel.

Turkey: Banks May Turn To Securitization In The Face Of A Slowing Economy

Significant consumer loan growth over the past few years may leave Turkish banks exposed to a decelerating economy

in 2014. Nevertheless, consumer loan portfolios, in aggregate, are performing well with total nonperforming consumer

loans slightly above 2%. Traditionally, Turkish banks have preferred short-term funding resulting from a historically

steep yield curve. Given recent spikes in short-term rates, we could expect banks to investigate using alternative


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funding sources such as securitization. Consumer loan securitizations are familiar products across the emerging

markets and typically include robust structures that are resilient against economic volatility.

On the other hand, a slowing rate of credit growth, which is approaching the domestic savings rate, could alleviate

pressure for additional sources of funds. If the savings rate is sufficient to fund the projected increase in lending, then

banks would not need to turn to the capital markets for funding.

On the cross-border side, banks will continue to seek ways to access longer-term funding sources suited to their needs.

DPR transactions have dominated the Turkish structured finance market for many years, providing financial

institutions with a stable source of hard currency financing (see chart 7). Such transactions have performed well to date

and are expected to remain a feature in the market in the short to medium term.

Islamic Finance: Structured Finance Deals Should Increase Following IILM'sNew Certificate Program

On the heels of the IILM's debut, we expect a proliferation of structured transactions in the Islamic finance sector.

Traditionally, most Islamic finance transactions have been asset-based rather than asset-backed but we expect this

trend to change in the short to medium term as issuers seek to further diversify their funding sources.

Last year we witnessed the long-awaited establishment of the IILM global short-term certificate program, which issues

short-term, Sharia-compliant certificates with maturity profiles of less than one year. This first-of-its-kind product

caters to Islamic financial institutions that currently lack Sharia-compliant money market instruments for managing

their short-term liquidity. The vehicle was established solely for purchasing sovereign, sovereign-linked, or

supranational sukuk assets with long-term ratings that correspond to an 'A-1' Standard & Poor's rating. The 'A-1' rating

on the program depends on the vehicle's asset eligibility criteria that, among other requirements, limit the purchase of

assets to those having a long-term rating corresponding to 'A-1'. Additionally, the transaction benefits from conditions

restricting the certificate issuances, which include minimum levels of liquidity and non-defaulted assets and sufficient

cash flows to cover profit and expenses of the vehicle. Moreover, the vehicle benefits from liquidity support in the form

of primary dealer agreements from 'A-1' rated financial institutions. Under such agreements, financial institutions must

purchase up to their maximum in certificates in any single auction.

The IILM 2 SA vehicle is structured to be bankruptcy-remote, thereby mitigating the potential for an insolvency of the

program upon an insolvency of the owner, IILM. IILM acts as the program administrator of the vehicle. It is an

international institution established in October 2010 by central banks from key Islamic finance jurisdictions and one

multilateral institution, to address the lack of Sharia-compliant liquidity tools available to Islamic financial institutions.

IILM was created under the International Islamic Liquidity Management Corp. Act of Malaysia, and is governed by the

Articles of Agreement among its members. Under its mandate, it is charged with the role of issuing and holding

U.S.-dollar-denominated sukuk with the intent of creating and distributing short-term Sharia-compliant financial

instruments.


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South Korea: Cross-Border Structured Finance Transactions Have BeenLimited, But Covered Bond Issuance Could Rise In 2014

Starting from typical emerging market securitizations in the 1990s, such as airline ticket receivables and monoline

insured transactions, South Korea has become the third-largest securitization market in APAC. For 2013, new

securitization issuances amounted to KRW51.3 trillion (approximately US$48.2 billion), which includes both domestic

and cross-border issues.

Since July 2011, cross-border securitization issuance volumes were affected by restrictions imposed on

credit-specialized financial companies that caused many originators to reduce non-Korean-denominated financings,

including securitizations. Nevertheless, over the past five years Korean cross-border securitizations have been

characterized by traditional asset classes with relatively short tenors. These asset classes include credit card

receivables and auto loans, reflecting, in our view, international investors' preferences over much longer-tenor assets,

like residential mortgages. We believe this trend will continue in the Korean cross-border securitization market in 2014.

In terms of the Korean domestic market, residential mortgage loans have dominated securitizations, accounting for

about half of them, primarily led by government-sponsored entities, such as Korea Housing Finance Corp. (KHFC).

Other major asset classes include installment sales of cell-phone handset receivables and nonperforming loans (see

chart 8).


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Chart 8

Since Kookmin Bank issued $1 billion in structured covered bonds in 2009, no private issuer had followed suit because

no specific law had regulated covered bond issuance. Korea Housing Finance Corp., a government-related entity, had

been an exception given that it had its own specific law enabling it to issue covered bonds.

In December 2013, however, the National Assembly in Korea approved the Korean Covered Bond Act to pave the way

for private banks to issue covered bonds. The new law is expected to become effective in second-quarter 2014 after

the president's promulgation. Private banks in Korea that are eligible as qualified issuers with certain capital thresholds

will be able to tap into an international investor base by taking advantage of the new covered bond laws. The law

would allow cover pools to include long-term, fixed-rate residential mortgages, public sector debt, and other

transportation-related mortgages (e.g. aircraft and shipping vessels). A surge of Korean covered bond issuances may

happen in 2014, subject to a number of conditions, such as overseas investors' appetite for the new structure and the

credit quality of the underlying assets.

China: Government Initiatives May Accelerate Securitization MarketDevelopment In Coming Years


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We believe that recent developments in China's securitization market will allow issuance volumes to grow in the near

future. These mainly consist of the Chinese banking regulators' (The People's Bank of China [PBOC] and China

Banking Regulatory Commission [CBRC]) decision to expand the securitization pilot program as well as similar

securitization-like initiatives by other regulatory arms such as China's Securities Regulatory Commission (CSRC).

China's domestic securitization market started in 2005 when a couple of CLO and RMBS transactions were launched

as part of an asset securitization pilot program. However, in light of the global financial crisis, the market evolved

slowly due to regulators' caution regarding structured products. Nevertheless, since 2011, activity has increased and

regulators have set a clearer agenda in this market, including expanding the asset securitization pilot program to more

economic sectors such as non-bank financial institutions, and the increase of the aggregate issuance cap to RMB50

billion. Banking regulators have focused on deals that could facilitate other policy initiatives, such as financing to

SMEs, infrastructure developments, local governments, public housing, and the agricultural sector. In addition, other

Chinese financial industry regulatory arms introduced separate initiatives that extended the asset segregation and

asset-backed features of securitization to other sectors. These include the CSRC's securitization program for

corporates, which allowed corporations to issue certificates collateralized by either their future revenue or current debt

assets.

There have been some recent international securitization transactions related to Chinese assets, which were issued by

foreign institutions that do not fall under the aforementioned regulations. Such transactions reflect increasing interest

from international investors in China-based assets, and they generally incorporate repackaging of single bonds/loans,

trade receivables, and third-party guarantees.

In our opinion, some potential hurdles remain for China's securitization market to fully develop. Important pieces of

the securitization infrastructure, such as a comprehensive legal framework and procedures to support asset

segregation and protection, are still under legislative process. The market is also expecting more transparency of

origination standards and validation, asset performance history, and servicing practices. Moreover, standardized

third-party engagement practices and participation from different investors (previous investment in securitization

papers has come mostly from the issuing banks) takes time to develop. Standard & Poor's expects these will be

sequentially addressed in the short to medium term as issuance picks up and the market accumulates experience.

Taiwan: Limited Asset Spreads Will Constrain New Issuance In 2014

Persistently low credit spreads from residential mortgages and corporate debt have curbed new structured finance

issuances in the past few years in Taiwan. Nevertheless, in our view, domestic investors' demand for securitization

papers has largely recovered from past years because of solid performance from these products and a need for

diversification. However, the supply side will continue to constrain new issuance due to ample liquidity and fierce

competition among Taiwanese banks, which leads to low asset yields. Low loan-to-deposit ratios in the banking

industry also discourage banks from engaging in wholesale funding such as issuing structured finance instruments.

Having said that, the corporate sector is showing more interest in using securitization for funding diversification and

the matched funding of receivables assets. Also, the government is leveraging securitization to fund new infrastructure


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projects. Repacked CDO transactions backed by foreign fixed-income instruments have also gotten more attention in

recent quarters as the rules surrounding the inclusion of foreign assets as underlying collateral and reference entities in

investment products have been relaxed.

Taiwan's structured finance market began in 2002 after regulations governing the securitization legal framework, such

as true sale and bankruptcy remoteness, became effective. Since then, numerous structured finance transactions have

been launched (see chart 9). Over the past decade and particularly after 2006, CDO transactions dominated Taiwanese

structured finance transactions in terms of dollar amount (see chart 10) and the majority of these were placed with

domestic investors. The performance of Taiwanese structured finance transactions has been stable except for some

CDO transactions backed by overseas assets.

Chart 9


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Chart 10

Structured Finance Will Expand Across The Emerging Markets In 2014 As NewAsset Types And Better Securitization Frameworks Evolve

New frameworks for securitization across the emerging markets are expected to encourage the expansion of structured

finance into new frontiers in 2014. Growing loan portfolios and an evolving global regulatory environment will

encourage supply while enhanced security and yield will drive the demand side of the equation. The domestic markets

will continue to represent an overwhelming percentage of activity while the cross-border markets will add diversity

and size to global issuance levels. Across Latin America, ABS will be the driving force, while Mexico will also

experience steady RMBS issuance. We also expect the Andean and Central American regions to introduce novel

structures on the back of LatAm Airlines Group's securitization.

In EEMEA, we expect Russia to build on its momentum with the introduction of new ABS legislation and Sub-Saharan

Africa to explore future flow securitizations. Turkey is likely to begin turning towards ABS products on the back of

years of consumer credit expansion while Islamic Finance explores new territory with asset-backed transactions.

APAC will see new covered bond legislation in Korea and new regulatory initiatives in China by government agencies,

both of which are expected to boost structured finance activity. Overall, growth in new and unique asset classes across


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the regions promises to deliver an exciting year for emerging markets securitizations.

Related Criteria And Research

• Mexican RMBS Index: After A Lackluster 2013, Expectations Are Higher For Mexican RMBS In 2014, Feb. 18, 2014

• 2014 Taiwan Credit Outlook: Global Economic Recovery Could Reduce The Negative Rating Bias On Corporate

Credits; Other Ratings To Remain Stable, Jan. 20, 2014

• Mexico Long-Term Foreign Currency Rating Raised To 'BBB+', Local Currency Rating Raised To 'A'; Outlook Is

Stable, Dec. 19. 2013

• Credit Conditions: Growth In Latin America Expected To Pick Up In 2014 Amid Continuing Financial Market

Volatility, Dec. 13, 2013

• Focus On Servicing: Global Servicing Trends In 2013 And Outlook For 2014, Dec. 13, 2013

• New Issue: HC Finance LLC, Nov. 28, 2013

• Global Bank Corp.'s 2012-1 Covered Bond Notes 'BBB' Rating Affirmed After A US$100 Million Upsize, Nov. 1, 2013

• Presale: Driver Brasil Two Banco Volkswagen Fundo de Investimento em Direitos Creditórios Financiamento de

Veículos, Oct. 29, 2013

• Presale: Guanay Finance Ltd. (Series 2013-1 $450 Million Senior Secured Notes), Oct. 22, 2013

• Rating On Guatemala Electricity Trust's 2004 Notes Raised To 'BB (sf)', Oct. 10, 2013

• New Issue: Bayport Securitisation (RF) Ltd., Sept. 30, 2013

• Republic Of Peru, Sept. 6, 2013

• Federative Republic Of Brazil, July 19, 2013

• A Stable 2012 Continues Into 2013 For The South Korean Structured Finance Sector, July, 2, 2013

• New Issue: CJSC Mortgage Agent of AHML 2011-2, June 18, 2013

• Sector Analysis: Mexican Lease-Backed Securitizations Show Solid Performance, May 16, 2013

• New Issue: Brazil Minas SPE, April 5, 2013

• Key Credit Considerations For Korean Covered Bonds Under Possible Legislative Framework, Sept. 26, 2012


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