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Market players see new potential for Asian securitization in the world after Covid-19

By Tom Brown
15 Sep 2020

Securitization market participants are predicting growth across Asia where financial support from governments following Covid-19 has opened up the potential for the securitization of defaulted assets, particularly in markets with a budding ABS sector.

On a virtual roundtable held by GlobalCapital and Vistra on September 14, speakers said that, following the Covid crisis, non-performing loan levels could surge upward of $600bn across Asia, of which more than $350bn is predicted to come from China. Another $150bn-$250bn will likely come from India.

In that context, investors and securitization experts are looking for opportunities borne of the pandemic, seeing value in defaulted loans across Asia. 

Emerging economies in Asia often see their financial products’ ratings capped because of the overall rating of the sovereign. Securitization can raise the rating of a pool of assets to triple-A for the senior tranche, allowing institutional investors such as insurance buyers to put money to work.

“That’s where we see a lot of potential for securitization, because the project finance or infrastructure financing market in this part of the world continues to be very much dominated by banks, export credit agencies, multilateral financial institutions,” said Nicholas Tan, chief operating officer at Bayfront Infrastructure, which developed Asia’s first securitization of project finance and infrastructure loans in 2018. “So we do want to mobilise the new source of liquidity to invite more participation from institutional investors and to try and create a product that’s suitable for them.”

Speakers pointed to CLOs in particular as vehicles ready to demonstrate their value to investors in times of crisis, and a chance to repair the reputational damage sustained following the global financial crisis, when they were often associated with collateralised debt obligations (CDOs).

Supply chain finance changes also have the potential to realign securitization, moving emphasis away from China as trade tensions with the US increase.

“There will be a reconfiguration of supply chain dynamics in the region, and it goes without saying that once these sources also get realigned in the new ecosystem, the money will flow along with that,” said Navita Yadav, global head of capital markets for Vistra. 

“So this could be the early signs that we will see much more localised securitization structures. The banks who are present in smaller markets like Indonesia, Malaysia, the Philippines, Singapore, Thailand, may start looking at realigning their strategies.”

With high-street banks able to access central bank liquidity in the near future, non-banks are set to be the primary drivers of securitization. Negative rates off the back of monetary stimulus will also fuel the growth of the securitization market.

“Eventually, there will be some reckoning for that massive growth of balance sheet, and the cost of sovereign or other high quality credit, and I think in that context securitization, which is really based on asset cash flow, will have very attractive risk-adjusted return,” said Weili Chen, head of commercial ABS and capital markets solutions at Standard Chartered Bank. “And it will emerge as a more viable investment choice to a really wide range of investors in that low rate context and the massive expansion of government balance sheet.”

By Tom Brown
15 Sep 2020