The securitization markets in Asia have been in existence for
over 10 years but have enjoyed mixed success.
Hong Kong
Hong Kong has always been, from a legal perspective, one of the
most securitization friendly jurisdictions in Asia. However, the
asset-backed securities (ABS) market has failed to develop as
rapidly as many in the industry would have hoped. The legal system
is based in general terms on English law, so structuring true-sale
transactions from a legal, regulatory and accounting perspective
has been easy to follow. The regulatory guidelines issued by the
Hong Kong Monetary Authority in 1995, and revised in 1997, largely
follow the Bank of England model. However, high levels of liquidity
in the market have allowed cheaper ways of raising finance through
methods such as syndicated lending and unsecured bond issues and so
potential issuers have avoided the comparatively complex and
expensive financing using securitization. The market was also
disrupted in the first half of 2003 with the outbreak of the Iraq
conflict and Severe Acute Respiratory Syndrome (SARS). The Hong
Kong Mortgage Corporation (HKMC) continues to be the most frequent
issuer in the Hong Kong securitization market through issuance
under programmes such as the Bauhinia MBS Limited HK$3 billion
($385,000) mortgage-backed securitization programme. The HK$3
billion issue (Series 2003-1) followed HKMC's debut MBS HK$2
billion issue (series 2002-1) launched under the same programme in
March 2002.
However three developments raise hopes for the further growth of
the securitization market in Hong Kong.
Firstly, the Hong Kong Securities and Futures Commission (SFC)
passed a code governing REIT laws, which are expected to generate
investor interest in Hong Kong. The current code has been subject
to some market commentary, but further changes are expected and, as
in Singapore, the development of the REIT sector may also introduce
the prospect of further CMBS.
Secondly, in October 2003 HSBC completed a HK$3 billion
synthetic securitization, which was the first ever synthetic
transaction involving taxi and public light bus loans and the first
non-Japan Asia balance sheet securitization to feature a portfolio
of non-mortgage consumer and small- to medium-sized obligations. To
that date there had only been two public synthetic balance sheet
deals completed in the region: ABN AMRO's HK$1.1 billion
mortgage-backed offering in December 2000 and DBS's S$224 million
($130 million) collateralized loan obligation through JP Morgan in
December 2001. This could be a positive development for the Hong
Kong market, both because HSBC is securitizing its assets for the
first time and also because the use of a synthetic structure is a
good example of how institutions can manage their balance
sheets.
Lastly, the Hong Kong government has recently completed a HK$6
billion securitization of its bridge and tunnel tolls, through Hong
Kong Link 2004 Limited. This is the first stage in the government's
plans to raise at least HK$21 billion through securitization and
should not only help to develop the local bond markets but also
give a long needed boost to the securitization business in the
region.
Korea
Most of the securitizations that take place in Korea use the Act
Concerning Asset-Backed Securitization, Law 5555 of September 15
1998 (the ABS Act), which enables certain categories of originator
to avoid some of the onerous procedural and regulatory requirements
of the Korean Civil Code. The ABS Act permits the creation of
trusts and onshore and offshore SPVs for the purpose of issuing
securities. The securitization vehicle must acquire the
securitization assets by means of a true sale in accordance with
Article 13 of the ABS Act. A securitization plan must be registered
with the Financial Supervisory Commission (the FSC) setting out the
range and categories of the assets to be securitized and various
matters relating to the originator and the management and
disposition of the assets. The transfer in respect of the assets
(at closing and in respect of any subsequent transfer of assets)
must be registered with the FSC, which is effective to perfect the
transfer against third parties.
The passing of the ABS Act provided a substantial boost to the
Korean ABS market; US$3.6 billion of issuance came out of Korea
alone in 2002 to 2003, and credit card securitizations comprised
many of the domestic transactions and formed the bulk of the
cross-border transactions completed to date. However, during the
second half of 2003, the level of delinquency in respect of credit
card payments had reached record levels and most of the outstanding
credit card securitization transactions were restructured or went
into early amortization and were paid down earlier than scheduled
(due primarily to the lack of eligible receivables to be purchased
and the resulting build-up of cash in the structure). Monoline
insurance companies are, for the moment, generally reluctant to
back credit card securitizations in Korea and this position is
likely to remain so until the credit card market shows evidence of
consistent recovery. Other consumer-related transactions have not
been so severely affected - as the recent AMBAC wrapped deal for
Korea First Bank proved.
The Korean cross-border securitization market however, is not
solely dependent on credit card securitizations and Korea was still
an active market for asset-backed transactions: securitizations of
other asset classes, including auto loans and airline ticket
receivables, took place in 2003. In April 2003, Banc One Capital
Markets, Inc securitized a pool of auto loans originated by Hyundai
Capital Services Inc. In September 2003, Nomura International acted
as arranger and joint lead manager with The Korea Development Bank
on Korean Air Line's ¥27 billion (US$238 million) securitization of
airline ticket receivables from its flight routes between Korean
and Japan. Citigroup followed with a repeat transaction for Asiana
Airlines Inc in December 2003 for ¥10 billion of its airline ticket
receivables on its flight routes between Korea and Japan and, also
in December 2003, did a further issuance out of the master trust
established in 2000, which securitized ticket sales on Asiana's
flight routes between Korea and the US.
The overall mood in Korea is improving with respect to
securitization as the focus of arrangers and others turns to
non-consumer-related receivables, such as infrastructure and
transportation, and it is with respect to these asset classes, plus
residential mortgages, that there is likely to be activity in the
second half of 2004.
Singapore
Like Hong Kong, Singapore follows a common-law system, based on
English law. In September 2000, the Monetary Authority of Singapore
(MAS) issued guidelines for securitization by regulated entities
and for the capital treatment of credit derivatives. However, even
though a sophisticated legal system is in place, securitization in
Singapore has had a slow start when compared with countries such as
Japan and Korea and much of the ABS market (excluding CDOs) in
Singapore has been dominated by property-related transactions
(about 70% of the 2003 issuances were property related).
A number of transactions have closed that securitize periodic
future instalment payments to be made for apartments bought off
plan. In addition, there have been several CMBS transactions
securitizing assets, such as shopping malls. Singapore is seeing
the emergence of CMBS as a financing tool for REIT assets and there
is an expectation that there will be more activity in this area as
the REIT market develops. A recent REIT by Cheung Kong (Holdings)
was also the first REIT to include offshore assets (retail malls in
Hong Kong). Another interesting development has been the rise in
synthetic CDOs.
With the combination of property deals including REITs, as well
as CDO transactions, Singapore is likely to grow further into a
powerful force in securitization in Asia.
Japan
Along with Hong Kong, Japan has one of the longest histories of
using securitization as a financing technique, helped by several
legislative changes. A wide range of asset classes has been
securitized, including consumer receivables, real estate and
non-performing loans, and recent transactions have had some whole
business securitization features. But, overall, cross-border
activity is reducing as the market has become more domestic and
this is a trend that is likely to continue. However, Japan remains
one of the deepest and most developed securitization markets in
Asia and it is hoped that the development of innovative structures
(such as the Korean Air Lines yen receivables deal that closed in
September 2003) that will have application in other jurisdictions
in Asia will continue.
China
Securitization in China has been the subject of much talk for a
long time. A number of transactions have closed including two
freight receivables deals for COSCO that, although involving US
dollars and other hard currency receivables owed offshore, did have
a PRC law true sale. That said, there are at the rating agency and
investor level concerns about actually achieving a true sale under
PRC law, as well as how the comparatively undeveloped bankruptcy
laws would view a purported true sale.
Recent transactions taking advantage of the Trust Law and using
non-performing loans as the assets have generated much interest and
it is encouraging to see such developments. However, for
securitization involving true sales and structures familiar to US
or European investors to occur, a number of legislative changes,
including to company law (to permit insolvency remote SPCs),
bankruptcy law and tax law, are needed.
Malaysia
Guidelines for ABS and private debt securities were published by
the Securities Commission of Malaysia (the SC) on April 11 2001 and
updated in May 2003, setting out the parameters for securitization.
These guidelines provide that issuers are required to submit an
application to the SC for approval, declaring their compliance with
the requirements, a preliminary rating report, a true-sale legal
opinion and a valuation report (if the assets to be securitized are
properties). The SC published new guidelines on offerings of
structured products in December 2003.
Securitization in Malaysia originated in 1986 when Cagamas
Berhad, the national mortgage corporation (Cagamas), was
established to promote the secondary mortgage market in Malaysia.
Cagamas purchases housing loans from financial institutions and in
return issues bonds to raise funds. As at March 8 2004, the total
amount of Cagamas bonds and notes outstanding in the market was
RM28.7 billion (US$7.5 billion). Apart from Cagamas, Danaharta
National Berhad and Danamodal National Berhad were stabilized to
purchase non-performing loans and to finance bank recapitalization
respectively.
ABS is a comparatively new way of raising funds in Malaysia, and
several firsts have been undertaken in recent years. In July 2001,
Malaysia saw the first (and, to date, only) whole business
securitization in Asia, which was completed by Nomura for 1st
Silicon in Sarawak. Although the transaction benefited from support
from the Sarawak Economic Development Corporation as well as the
State of Sarawak, from a legal perspective the structure satisfied
the rating agency requirements for a whole business deal. In
December 2003, the first CLO was completed through the special
purpose entity Aegis One and another CLO using a similar structure
is scheduled to close soon. In 2003, there were several ABS deals,
including the first hire-purchase securitization by Bumiputra
Commerce Finance and the real estate securitization by Sunway
Holdings Ins Corp Berhad and Sunway Construction Berhad. The first
securitization of charge card receivables originated by Diners Club
(Malaysia) Sdn Bhd was completed in January 2004. The Sunway Group
closed its second property securitization in March 2004.
Although securitization activity in Malaysia to date has been
domestic, the legal and regulatory infrastructure is in place to
encourage further offshore development.
Taiwan
Taiwan represents a growing source of excitement among bankers
and lawyers. After the introduction of a securitization law in
mid-2002, seven transactions have closed including one cross-border
deal. All the transactions have taken some time to close as those
involved worked with the new legislation. However, there is wide
interest in securitization across a wide range of asset classes and
hopefully the heightened interest will develop into
transactions.
Thailand
There were few securitizations in Thailand before the Asian
financial crisis of 1997. Most were auto loan deals that were, for
various reasons, especially tax reasons, structured more as secured
loans than true sales. Subsequent to the crisis, the market has
failed to develop, partly as a result of uncertainty in relation to
the legal and regulatory regime for securitization transactions,
but also because domestic banks are willing to lend to originators
at low interest rates.
With the completion by Standard Chartered Bank of Thailand's
first private sector securitization for AEON Thana Sinsap
(Thailand) Public Company Limited, which tested the viability of
the existing legislation, and a recent increase in domestic debt
issued by Thai companies, there is potential for the further
development of the structured finance market in Thailand. The
Emergency Decree on Special Purpose Vehicles for Securitization
(the Securitization Decree) was passed in August 1997, permitting
certain categories of originator to securitize certain categories
of assets, for which the Thai Securities and Exchange Commission
(the SEC) has given prior approval. The Securitization Decree
provides that, in respect of the transfer of a pre-approved
category of assets by an SPV (in the form of a public or private
limited company, mutual fund or such other form as is approved by
the SEC), perfection and transfer of security are automatic without
the need to notify obligors and there is some degree of protection
from the bankruptcy of the originator. In addition to the Bt1.5
billion (US$37 million) consumer finance receivables securitization
of AEON Thana Sinsap (Thailand) Public Company Limited, which was
completed in February 2004, Lehman Brothers undertook a Bt7.16
billion securitization of a portfolio of Thai mortgage loans in
late 2002 (the first mortgage-backed securitization after the
Securitization Decree was enacted) and, also in 2002, Devonshire
Capital, a local private investment bank, acted as arranger in a
securitization for the National Housing Authority, which was one of
the first publicly rated securitization transactions in the Thai
market. If further proposed legislative changes go ahead, it is
likely that the securitization market in Thailand will expand more
aggressively.
Indonesia
Before the October 1997 financial crisis, a number of domestic
and cross-border securitization deals had been closed. These
transactions were not without their difficulties, including some
tax issues, but they show that the legal framework for
securitization exists in Indonesia, and that there are Indonesian
originators whose asset pool and servicing standards were capable
of supporting an international deal. Indeed the first cross-border
transaction to close in Indonesia in 1996 (for PT Astra Sedaya
Finance) was wrapped by Financial Security Assurance. The last
securitization deal completed was in October 1997 involving
motorcycle loan receivables also wrapped by Financial Security
Assurance.
Regulations were published in December 1997 regulating the
issuance of asset-backed securities supported by a pool of
receivables. The regulations require the investment manager to
submit to Bapepam, the capital markets regulator, a registration
statement, together with other documents, including a legal
opinion, the proposed final prospectus and a collective investment
contract. Unfortunately, these regulations have remained dormant
since their introduction: there have been no ABS transactions
completed since the Asian financial crisis in 1997. However, in
recent months, several Indonesian institutions have been
contemplating deals involving credit card and auto loan receivables
and, with the supporting legislation in place (although largely
untested), it is hoped that domestic and, eventually, cross-border
deals will appear.
Philippines
There has been much discussion of securitization in the
Philippines over the years, especially in relation to the topic of
workers' remittances. But nothing has happened (the Philippines Air
ticket securitization being a notable exception). There have been
recent legislative changes to facilitate securitization but the low
rating of most possible originators (coupled with a high level of
domestic bank liquidity) will make deals difficult to structure and
sell in the current market.
Greater willingness needed
Over the last ten years, Asian securitization has had a
chequered history, from the high hopes of 1994 to 1996 and the
post-1997 depression to the high levels of activity in 2000 to 2003
- and now has entered into a comparatively quiet period. More Asian
countries now have specific legislation in place to encourage
securitization but there needs to be greater originator willingness
and desire to do the deals and much greater investor understanding
and appetite before securitization becomes in Asia the financing
business that it is in the US and Europe.
Author
biographies
Neil Campbell
Paul, Hastings,
Janofsky & Walker LLP
Neil Campbell is a partner and head of Paul Hasting's Asian
securitization and structured finance group outside Japan, based in
the Hong Kong office. He has been involved in securitization
transactions in the UK and Europe, and has led teams that were
involved in some of the first securitizations in Korea, Hong Kong,
Indonesia and Thailand.
Neil is one of Asia's leading securitization and structured
finance lawyers. He is ranked in the Asia Pacific Legal 500 and
Euromoney's Guide to World's Leading Structured Finance Lawyers. He
has won several high-profile awards for recent transactions,
including the innovative Korean Airlines, KEB Card and 1st Silicon
transactions. He writes and lectures frequently on securitization
and structured finance.
Michelle
Taylor
Paul, Hastings,
Janofsky & Walker LLP
Michelle Taylor is of counsel in Paul Hastings' Asian
securitization and structured finance group in Hong Kong. Since
relocating to Hong Kong from London in 1998, Michelle has acted for
arrangers, originators and monoline insurers on high-profile
transactions throughout the region, including the first whole
business securitization in Asia, the first future flow
securitization in Korea and Japan, one of the first securitizations
in China and some of the first credit card receivables transactions
in Korea (acting for Samsung Capital, Citigroup, CSFB, ING
Securities, Merrill Lynch and XL Capital Assurance).
Michelle is ranked in the Asia Pacific Legal 500 as one of
Asia's leading securitization and structured finance lawyers. She
has won several awards for recent transactions, including the
innovative Korean Airlines, KEB Card and 1st Silicon
transactions.
Paul, Hastings, Janofsky & Walker LLP
22/F Bank
of China Tower
1 Garden Road
Central, Hong Kong
Tel: +852 2867 9988
Fax: +852 2868 1017
Web:
www.paulhastings.com