Asia's securitisation markets are busier than ever, with active markets in Taiwan and Malaysia alongside Korea, India and Hong Kong. But perhaps most importantly, there is now plenty of demand among investors in Asia. Mark B Johnson reports.
Ask international investors for the most impressive Asian ABS of 2004, and as likely as not they will pick Korea First Bank's two landmark residential mortgage backed securities (MBS) issues, one in dollars and the latest in euros.
US private equity group Newbridge Capital took over Korea First Bank in 2000 and it has become a textbook issuer for balance sheet efficiency and funding diversification.
In early November, Korea First priced the tightest ever Asian ABS deal in euros, selling Eu550m of MBS wrapped by triple-A rated monoline insurer Ambac at 21bp over three month Euribor, via BNP Paribas, Calyon and Royal Bank of Scotland.
Korea First had sold its first offshore MBS in March when it raised $500m, also with an Ambac wrap. With a shorter average life of 1.8 years, that deal was priced at 38bp over Libor.
?Appetite in Europe is almost insatiable for triple-A wrapped paper with an underlying Asian flavour,? says Nancy Fox, managing director for Asia Pacific at Ambac.
UBS arranged Korea First's dollar issue. Anthony Cutcliffe, executive director in the UBS securitisation group, says the pricing of Korea First's November issue underlines how firmly South Korea is back in international investors' good books.
?The Asian premium that was previously demanded by offshore investors has reduced considerably,? he says. ?It is very encouraging for the future flow of Korean and other Asian deals into the offshore market.?
South Korea dominated non-Japan Asia's securitisation market from 2001 to 2003 ? that dominance lessened in 2004, as Taiwan, Hong Kong, Thailand, Malaysia, India and Singapore became more active.
?Structural, legal, and tax issues are now usually resolved by looking to solutions applied elsewhere,? says Calvin Wong, managing director, structured finance ratings for Asia Pacific at Standard & Poor's (S&P). ?The willingness to adopt tested models as the basis for new laws, as well as government and policy support, are probably critical in ensuring the orderly development of new securitisation markets in the region.?
In March Deutsche Bank arranged Taiwan's first MBS issue, raising NT$4.3bn for First Commercial Bank.
Vince Chan, a credit analyst at S&P, highlights the $118m JSB Taiwan Auto One transaction, arranged by HVB in September and rated AA-. Chan says the deal ?confirmed the ability of first-time Taiwanese issuers to venture offshore with viable structures backed by purely domestic currency assets.?
But going offshore no longer has to mean selling to Europe or the US. There is plenty of demand in the Asian region for cross-border ABS deals, as Standard Chartered proved.
Warren Lee, head of Asian securitisation, says that when Standard Chartered arranged a $300m car loan securitisation for Hyundai Capital Services in June, it sold the deal to accounts in Singapore, China and Hong Kong, including many first-time ABS investors.
?This was the first foreign currency issue solely distributed in the region,? Lee says. ?The key was that we could convince investors that auto loans do not perform like credit cards. Obligors need their cars, and they don't want to lose the money they have already paid.?
Malaysia's state controlled mortgage finance agency Cagamas tapped international Asian demand without going into a foreign currency, when it launched the country's first MBS. The M$1.56bn deal, backed by mortgages to civil servants, repaid by deductions from their pensions, was led by Aseambankers, Commerce International Merchant Bankers and Standard Chartered.
?Demand was overwhelming among Malaysian, Singapore and Hong Kong investors,? Lee says. The M$580m three year notes came at just 18bp over Malaysian government securities.
Some ABS specialists believe securitisation could pick up in Thailand after Standard Chartered in February arranged Thailand's third securitisation since the 1997-1998 financial crisis. The Thai subsidiary of Japanese consumer finance company Aeon parcelled Bt1.5bn of hire purchase receivables. But legal difficulties remain an obstacle.
Much of the excitement in 2004 occurred in Hong Kong, where the government appointed HSBC and Citigroup to arrange its HK$6bn securitisation of tolls from tunnels and bridges.
The leads priced the institutional part of Hong Kong Link 2004 after heavy demand in late April. The HK$450m fixed rate bullet due May 2005 was 3.2 times oversubscribed, while the HK$3.08bn floating rate tranche was 4.2 times oversubscribed. They were priced well inside expectations.
Fifty-six institutional investors participated, with 35% of the book made up of offshore buyers, from Europe, Japan, China, Singapore, Taiwan and Macau.
In early May, HSBC sold the HK$2.47bn retail portion to private investors in Hong Kong. ?Retail distribution is a complex and time consuming exercise,? Sarwar Ahmad, head of structured capital markets (Asia Pacific) at HSBC in Hong Kong, told EuroWeek at the time.
?We're extremely pleased to have taken this deal from mandate to launch in eight weeks.?
In November it was the turn of the Hong Kong Mortgage Corp, which sold a HK$2bn MBS, arranged by HSBC and Standard Chartered. The deal included a HK$900m retail tranche. ?It is a sign of things to come in the future when there is an originator with a household name and with which local buyers feel comfortable,? says Lee.
Indian securitisation enjoyed its most dynamic year in its 13 year history. Issuance leapt more than 156% in the April-September period.
The market is dominated by car loan ABS, with ICICI Bank and HDFC Bank the leading originators. But the range of assets is broadening and the year ahead might hold out the prospect of India's first offshore ABS issue.
The question now is whether China can emulate this growth. ?China is on everyone's list of markets to watch closely,? says Kevin Lam, head of securitisation for Asia at ING Bank in Hong Kong. ?The market still lacks specific, facilitating securitisation laws, but it may be possible to execute ABS-like deals under the existing legal infrastructure. In the long run the laws will come and there should be dramatic growth.?
As Asian investors become more familiar with securitisation, and then with its more esoteric asset classes, domestic or at least regional demand is likely to be increasingly sufficient to keep most of the paper in Asia. And that means more and more deals will be in local currencies.