Local currency securitisation has taken hold in Asia. As cross-border issuance languishes, demand from local investors has grown, and the domestic markets in countries like Malaysia and Taiwan have grown. And with the economic powerhouse of China setting out on the road to securitisation last year, the region's prospects are bright. Sarfraz Thind reports.
The Asian securitisation market has lived for the last decade in a perennial state of being about to take off, and it still has that tinge, but unquestionably in the last two years issuance in local currencies has become the cutting edge.
South Korea is the one large and busy securitisation market in Asia outside Japan, and most issuance there has long been in won, but elsewhere the norm until recently was internationally targeted deals.
But as other countries have begun to dismantle their regulatory barriers, and with growing demand from Asian investors, issuers have increasingly been developing their local markets.
"The issuance model is different now," says Warren Lee, head of asset backed securitisation at Standard Chartered Bank in Hong Kong. "People are looking at what is the most important funding source for their needs, and are increasingly turning to their local currencies. The domestic market may eventually take over."
The driver for much securitisation issuance in Asia is the growth in consumer lending. Other things being equal, it is better for consumer lenders to securitise in their home currencies, since that avoids the expense of a currency swap for a cross-border deal.
"Consumer financing is increasing rapidly in these countries," says Gary Watmore, head of Asian securitisation at ABN Amro in Hong Kong. "The growing middle class is looking for debt — in other words mortgages, autoloans, personal loans and credit cards — and there are good opportunities to finance this through securitisation."
In countries such as Malaysia and Taiwan, securitisation efforts have focused on the domestic markets since the technique began. The wide variety of deals in the Malaysian market over the last two years makes it second only to South Korea as the most diverse securitisation market in the region. There were eight ABS deals in Malaysia last year, up from five in 2004, and total issuance tripled from M$2.9bn in 2004 to M$8.8bn in 2005, according to Rating Agency Malaysia.
Last year the first global Islamic RMBS deal was issued in Malaysia, the M$2.05bn ($531m) sukuk musyarakah securitisation of Islamic mortgages, issued by national mortgage corporation Cagamas Berhad. There was also the first transaction involving a local government authority, the M$80m mudharabah tax receipts securitisation issued by PG Municipal Assets Berhad, as well as four securitisations of plantation assets, led by the M$143m ($39m) Midas Plantation issue in June.
In Taiwan, an almost exclusively domestic market, the deal pace has been rapid. At the end of 2005, the rated amount of securitised financial assets issued under the Financial Asset Securitisation Law totalled around NT$170bn ($5bn), around three times the 2004 figure, according to Moody's. However, there had been only one cross-border transaction, a Eu255m residential mortgage backed security (RMBS) issued by Hsinchu International Bank and arranged by Calyon.
India and China excite
As the three most active domestic markets, Korea, Taiwan and Malaysia will be big drivers of Asian securitisation issuance in the future. However, most excitement in the region is focused on India and China.
Despite an absence of formal guidelines, India has had one of the most thriving securitisation businesses in Asia over the last two years — and it is entirely domestic.
There was around Rp250bn ($5.6bn) of asset backed issuance last year, according to Fitch. But sales have declined sharply this year since the Reserve Bank of India published new guidelines on securitisation in February.
Market participants were aghast at the RBI's strict approach, especially a hefty capital charge for originators that retain first and second loss pieces, which has taken away one of the incentives for securitising. The regulatory clampdown has coincided with a liquidity crunch in the bond market, so there have been only a handful of new deals this year. Fitch expects annual issuance to halve this year.
But securitisation specialists are looking on the bright side. "Until now there has been no framework for securitisation, just a few circulars, and these rules will give domestic investors more confidence in the long term," says Rajat Surey, head of asset backed securitisation for India at Standard Chartered. He adds: "Some relaxation of the rules would, however, help issuers."
China took its first public steps into the securitisation market last year with the launch of two government-backed pilot programmes, the Rmb4.2bn ($500m) collateralised loan obligation originated by China Development Bank and a Rmb3bn ($373m) RMBS by China Construction Bank. There were also five ABS transactions under a separate legislative structure, the collective asset management programme (Camp).
Participants have waited a long time for China's securitisation business to develop, and given the country's obvious potential in terms of asset size, there is considerable excitement in the market. However, despite strong interest in the pilot schemes, there is unlikely to be a flood of deals in the near future, since the China Banking Regulatory Commission is taking a resolutely conservative approach.
However, participants hope the ABS market may develop quickly, since non-bank companies have been able to avoid the CBRC's requirements.
"There is more potential interest in the Camp deals than the bank securitisations because of the strong focus on corporate funding in recent times," says Kyson Ho, director of securitisation and structured capital markets, Asia Pacific at HSBC.
If bankers' and investors' hopes for China and India are realised, Asian currency securitisation could boom over the next couple of years.