22 January 2007
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Securitisation was first used in Asia as a means of financing in 1994. However, the financial crisis of 1997 was a setback to the growth of the market and issuance levels have not yet begun to approach the levels seen in the US, Europe and Australia after a similar period of time.
However, the market is continuing to develop and potential growth is significant, particularly with China's emergence.
From a legal perspective, most countries in Asia are securitisation friendly. The common law jurisdictions, such as Hong Kong, Singapore and Malaysia, have not had to introduce any specific legislation (other than some regulatory guidelines) to permit securitisation. However, specific securitisation laws were required in the civil law jurisdictions. Over the past 12 years, laws and regulations have been promulgated to promote and support securitisation in Japan, Korea, Taiwan, Indonesia, the Philippines, Thailand, India and the People's Republic of China. However, despite the existence of a securitisation friendly legal, accounting and regulatory framework in most of these jurisdictions, the market has been dominated by Japan and issuance across the rest of the region has largely been sporadic, with very little repeat issuance outside South Korea.
The Japanese market is mature and has been dominant since the 1990s. The market has largely been real estate based, but in recent years more innovative deals have surfaced, including whole business securitisations, future flow transactions and the securitisation of receivables from diverse assets such as wedding halls and funeral parlours. On the whole, there is a relatively deep and sophisticated domestic investor base supporting the growth of the market and few of the deals are issued internationally. As a result of the distorting effects of the activity in Japan, most Asian ABS statistics are divided into ‘Japan’ and ‘Asia ex-Japan’.
Outside Japan, the most active Asian market in recent years has been South Korea. The market began with the development of a domestic investor base, which has shown sustained appetite for the product, and became cross-border in 2000-01 with the launch of the first airline ticket future flow securitisation (for Asiana Airlines) and the first consumer loan securitisation (for Samsung Card). In 2002, the volume of issuance took off with the Korean consumer credit boom. Credit card securitisation led the charge, with most cross-border deals being issued in US dollars with the benefit of a monoline guarantee. However, the consumer credit crisis in 2003-04 slowed the growth of the market (although future flow securitisation continued to be an important funding tool for the Korean airlines) and it was not until 2006 that the volume of cross-border issuance crept back up. 2006 saw the ninth cross-border consumer loan securitisation for Samsung Card and the sixth cross-border residential mortgage-backed security (RMBS) for Standard Chartered First Bank Korea (SC First Bank). At $1.2bn (£610m) (issued in US dollars and Euros), the SC First Bank RMBS deal was the biggest securitisation issuance in Asia to date. While consumer loan securitisation will continue to be an important part of the Korean ABS landscape in 2007, RMBS transaction volume is expected to grow significantly with the entry of several new issuers to the market. Synthetic securitisation has not yet been approved by the regulators, but it is hoped that some synthetic deals will be issued in 2007.
It is interesting to note that repeat cross-border issuance has become more common in the Korean securitisation market, with issuers such as Samsung Card, LG Card, Standard Chartered First Bank Korea, Korean Air Lines and Asiana Airlines issuing multiple cross-border transactions with increasingly lower margins. While master trusts are possible, most issuers choose to document their transactions on a stand-alone basis. The inherent benefits of a master trust are eroded by the fact that regulations necessitate the incorporation of a new on-shore special purpose vehicle (SPV) for each issuance. The relaxation of these rules to allow true master trust transactions is likely to further lower margins for issuers. Funding costs have also been reduced as consumer loan and RMBS issuers are now largely able to achieve triple-A ratings without third-party credit enhancement. The Korean securitisation market remains a strong force in Asia ex-Japan and is expected to continue to dominate in 2007.
Hong Kong, Indonesia, Thailand, Singapore, Malaysia and Taiwan
Prior to the 1997 Asian financial crisis, Hong Kong, Indonesia and Thailand were relatively active securitisation markets. Commercial mortgage-backed security (CMBS), RMBS and consumer loan transactions were popular in Hong Kong and auto loan securitisations were dominating the markets in Indonesia and Thailand. Since 1997, deals in Hong Kong have been few and far between, largely as a result of excessive bank liquidity. In 2005, Indonesia saw its first cross-border deal in nine years, the Indocoal future flow securitisation (the deal was restructured in 2006). No other Indonesian deals have come to market since. The Thai domestic market has seen some activity in the past two years and the cross-border market is likely to follow when economic conditions permit. A planned change in the law to permit future flow securitisation will also assist the development of the Thai market, although withholding tax issues remain.
Singapore continues to have a steady market, with several CMBS transactions for repeat issuers. The Malaysian market has been domestic to date. Convertibility and currency control issues have necessarily affected the development of a cross-border market. However, a US dollar-denominated cross-border whole business securitisation was completed in Malaysia in 2001 for 1st Silicon, a silicon wafer manufacturing company in Sarawak. US dollar receivables were trapped offshore, thereby minimising convertibility issues. Domestically, Cagamas, the national mortgage corporation, has been a driving force behind the development of the RMBS market.
Taiwan has been relatively active since its ABS laws were passed in 2002 and 2003. Assets such as residential mortgages and credit card receivables have been securitised domestically and internationally. However, repeat issuance is rare. The unlimited liability of the asset trustee has also been a lingering concern in the market and cross-border issuance has been affected by withholding tax considerations and convertibility issues. However, the domestic investor base rapidly became familiar with the product and shown willingness to invest in different asset classes.
Speculation about the development of a securitisation market in China reached fever pitch in the early 2000s. Potential onshore issuers and international financial institutions had been lobbying the government for many years to introduce legislation that would permit securitisation. Consumer loan and mortgage issuers were particularly aware that securitisation would be a valuable funding tool in the increasingly buoyant market, as evidenced by the volume of issuance under credit card and residential mortgage programmes in the US and Europe. The government recognised that a specific securitisation law was required to cut across layers of existing legislation to permit a true sale. After consulting the relevant interested parties, securitisation "pilot measures" were finally issued in July 2005. Two transactions have been completed under the measures (by China Development Bank and China Construction Bank) and it is widely expected that further refinements will be made to the pilot measures before other transactions follow. Amendments are also required – and are expected to be made – to the existing bankruptcy and tax framework in China to facilitate securitisation. In the meantime, other methods have been used to effect securitisation-type domestic transactions. The most popular have been transactions regulated by the Chinese Security Regulatory Commission (the CSRC) under the Specific Asset Management Plan. These transactions, which allow a securities firm to invest in specific assets with funds raised from domestic investors, are similar to a securitisation and can isolate cash flows from the assets to repay investors.
It is important to note that bank borrowing is the most common form of financing for Chinese corporations. The issuance of, and investment in, bonds and other debt in China is strictly regulated and the domestic investor base is limited. There is a huge impetus in China from regulators and potential issuers to develop a domestic securitisation market and, depending on regulations on investment, there is expected to be great demand from investors for the product. There is also demand from international investors but cross-border deals have been scarce, constrained by currency controls and transfer and convertibility risks. In 1997 and 1999 the Chinese Ocean Shipping Company completed two successful cross-border securitisations of future flow shipping receivables. In aggregate, the deals raised approximately US$600m (£307.4m) and the securities were backed by hard-currency receivables collected in offshore trust accounts, effectively minimising the transfer and convertibility risks. In October 2006 the first cross-border CMBS was completed, securitising Chinese Renminbi-denominated rental payments from tenants in nine shopping centres. Transfer and convertibility risk were minimised by obtaining regulatory approvals from the State Administration for Foreign Exchange and the execution of a Renminbi/US dollar currency swap transaction. These deals represent the tip of the iceberg and Chinese securitisation is widely expected to dominate the Asian securitisation market in the near future.
Bank liquidity and negative economic conditions have dampened the expected growth of securitisation in Asia. However, the continued steady presence of Japan, the increasing volume of issuance in Korea and the emergence of new transactions from other jurisdictions, including China, show that the Asian securitisation market continues to grow and develop and that the short-term outlook is positive.
elle Taylor is a partner at Orrick Herrington & Sutcliffe