Lawyers in Jakarta expect Indonesia’s
securitisation market to relaunch this year, with the
country’s first major cross-border securitisation
in two decades.
After several cross-border motor-cycle and auto
securitisations in the 1990s, Indonesia’s
securitisation market has suffered years of unfulfilled
promise. The last such transaction in the country
IndoCoal Exports’ 2006 issuance of an
$800 million 7% structured note– made headlines as the
region’s largest-ever securitisation. But there
have been no similar deals since.
O’ Melveny & Myers’ Joel
Hogarth told IFLR this was set to change. With
mortgage prices in Indonesia high and economic conditions
relatively stable, the relaunching of a domestic securitization
market made sense, he said.
"The possible issuance of cross-border mortgage or
asset-backed securities is being discussed," he said.
He predicted the market would emerge from a long period of
hibernation with either a commercial real-estate deal or a
Japanese-style auto-loan securitisation. He expected it would
then expand to other real estate backed securities as well as
Orrick Herrington & Sutcliffe’s Asia
managing partner Michelle Taylor agreed. As
Indonesians’ wealth grows, so too do the
aspirations of the rich elite and middle classes, boosting the
market for traditional status symbols such as cars and credit
cards, and ensuring more money is spent on them, she
In this environment, auto-loans are rarely in default.
"Repayments on car loans are usually met, as a matter of
pride," Taylor said. "Auto-loan repayments are also often
easier to meet, as they are cheaper than those for home
"The result is a stable pool of assets," Taylor said. "And
one which the public can both understand and invest in."
White & Case’s structured finance and
securitisation partner David Barwise said regardless of their
historical level of default, auto and consumer loans were much
more financeable assets than a long-dated mortgage pool or
"Auto loans are a hot asset class for securitisation in
Asia," he said. "That is primarily thanks to investor appetite
and their ability to exit these types of investments
Hogarth said there were currently several candidates who fit
the criteria for an auto-loan securitisation.
But Barwise warned the first such transaction could take at
least a year to complete and require lengthy discussion with
the parties involved as well as the regulators and bank
"A domestic securitisation will effectively be a new type of
transaction for Indonesia as previous deals in the country had
significant offshore elements and are therefore incomparable,"
"Domestic securitisations are trickier," he said. "They
require a deeper understanding of the financing, the country
and its legal system, as well as awareness of any security
issues and how best to exit from an investment."
It won’t be straightforward, he said. "You are
not always going to get favourable answers to your
Hogarth said tax was also an important consideration.
Indonesia is a high tax jurisdiction. If the deal is not
structured properly this could kill the deal from the
The most promising structures are probably onshore-offshore
structures. There have been a handful of small domestic
mortgage securitisations in Indonesia which have demonstrated
the viability of the onshore securitization vehicle - a
collective investment contract (or KIK).
The challenge is to successfully integrate the onshore
vehicle with an offshore issuance vehicle in a tax efficient
manner, which also satisfies the rating agencies and addresses
the needs of offshore investors. There may need to be embedded
swaps and a detailed ranking and collateral analysis.
"I''m confident these issues can be overcome, but it''s a
major investment for the first player to do this," Hogarth
said. "There are several companies that would like to do this
type of deal, but most are not keen on being first to market.
It could take up to a year before the first comes to
Nonetheless, development of the market was both viable and
logical, he said.
"Post global financial crisis, securitisation can be seen as
a bit of a dirty word," he said. "But the first layer of
securitisation often makes lot of sense and introduces much
needed liquidity into the market. The product only starts to
get a bad reputation once you start to see second and third
layer securitisations - these become incrementally more
difficult to assess risk and have a less obvious beneficial
Indonesia is very promising as an emerging securitisation
market as there is no first layer securitisation at present, he
said. Development of a cross-border securitisation market would
increase liquidity available for mortgages and auto-loans,
which would consequently reduce interest rates for
Barwise said development of an Indonesian securitisation
market made sense from a macro-economic perspective. "Emerging
markets are where the future growth is," he said.
"At a certain point in a country’s evolution
the conventional bond and bank market no longer meets
everybody’s capital-raising needs," he said.
"Indonesia has reached that point. From an offshore
financier’s point of view financing receivable
flows is preferable to unsecured corporate loans."
Successful securitisations rely on confidence in the
originating country’s legal system, and the
financial record of the banks issuing the loans. Taylor said
this could prove a problem in Indonesia where investors will
have concerns about corruption and the complex regulatory
Nonetheless, she said the development of Indonesian
securitisation was a good sign for the regional market. For the
past decade, this has been primarily focused in North Asian
countries, such as Japan and Korea.
"Further expansion of the market demonstrates that consumers
in the region are more stable which should in turn lead to a
stronger, more stable portfolio of assets to be securitised,"