The Federal Republic of Germany?s securitization of e5 billion of Russian Federation Paris Club debt is a landmark transaction.
The deal creates the largest ever emerging-market bond. Arranged and underwritten by Goldman Sachs and Deutsche Bank, it provides Germany with over e5 billion of revenues while shifting the risk that the Russian debt represents off its balance sheet.
Germany sold $2.4 billion of 10-year dollar-denominated bonds, e2 billion of three-year floating-rate notes, and e1 billion of five-year fixed-rate notes. An SPV, Aries, issued the notes, which were rated BB+ by Standard & Poor?s and Ba2 by Moody?s. Russia?s payments to Germany are transferred to Aries through amortization payments. Aries makes equivalent payments to German development bank KfW. KfW hedges its obligations and then pays Aries money to cover principal and interest payments to the bondholders.
The bondholders have taken the risk because, if the Federal Republic notifies certain defaults by Russia, they can only recover 20% of the principal on each note.
The question now is, what scope is there for more of these deals? The appeal of monetizing debt that until now has been locked up on sovereign balance sheets doesn?t extend to every potential issuer.