 |
"These deals are based on local assets that investors can see for themselves, which makes them quite attractive at the moment compared with cross-border transactions"
Kyson Ho, HSBC |
Few more worrying things could happen while you’re selling a programme securitizing government-owned assets than a military coup but this was the exact situation Kyson Ho, director of ABS and structured bonds at HSBC, faced in 2006 when book-building for a Bt24 billion ($761.8 million) ministry of finance-sponsored deal for Thailand. Of course this year something worse did happen: the sub-prime crisis and the consequent draining of liquidity in the ABS market. Despite these testing conditions the book for this year’s third and final tranche of the Thai deal was two times oversubscribed within two hours when offered on November 8. Seen in the light of several other recent transactions, this success suggests that the development of Asia’s fledgling local-currency asset-backed securities markets might continue smoothly, unhindered by the problems affecting the asset class elsewhere.
"Asia’s domestic securitization markets are still young and we don’t expect them to explode with many transactions any time soon," says Ho. "But we see strong potential for growth even in the current market conditions. Most local investors have little exposure elsewhere and aren’t writing down millions of dollars in sub-prime-related losses each week. These deals are based on local assets that investors can see for themselves, which makes them quite attractive at the moment compared with cross-border transactions."
The Thai deal securitizes future rental income from the treasury department of the ministry of finance, and is unusual in that the building was unfinished when the programme began – "no more than a hole in the ground," as Ho puts it. Encouragingly for the prospects of similar deals, recent market events seem not to have forced the issuer into paying an S-word tax: a premium simply for using the securitization model at a time when the asset class is under severe global scrutiny (see "The S word", page 78, Euromoney, November 2007). The 20-year tranche of the deal launched in 2005 paid 7.99%; last year’s 19-year tranche offered 6.50%, and this year the coupon was 6.05%.
"If anything the deal priced tighter each year as investors became more comfortable with the structure," says Ho. "Another reason that the deal was so popular is the duration: in Thailand you see mainly smaller deals of Bt3 billion to Bt4 billion and three-year to five-year tenors, whereas the three tranches of this deal were for Bt10.3 billion, Bt8 billion and Bt5.5 billion and had tenors of 20, 19 and 18 years, respectively. Even government paper tends to be short-term, and since many of the investors in Thailand are insurance companies, longer-dated paper is much more suitable."
Although it might seem riskier to buy paper where the underlying asset is – at least initially – a hole in the ground, the frightening speed with which distant failures in the US mortgage market destroyed the value of securities held by investors worldwide might encourage more local deals with an emphasis on familiar names. As one structured credit banker working in Japan says: "Investors who’ve seen the value of their mark-to-market portfolios collapse are coming back to simpler structures and are increasingly asking for products where the underlying assets are all Japanese companies. Synthetic CDOs based on corporate credit have done OK, it’s the cash products like ABS that have suffered. I’m not sure about other Asian markets but I think ABS will disappear here for a while."
Elsewhere in Asia, HSBC’s Ho identifies Thailand, Taiwan and China as offering the best conditions for local-currency securitizations. In China the government has been testing the water with a series of trial programmes – not all of them successful. China Development Bank had to scrap a planned Rmb8 billion ($1.07 billion) issue in June after a lukewarm reception in the market, and the task of leading the next wave of Chinese bank securitizations fell to Shanghai Pudong Development Bank which successfully launched a Rmb4.38 billion CLO on September 14. Then, on October 12, Industrial and Commercial Bank of China, the country’s largest commercial bank, completed its first securitization, with a deal worth Rmb4 billion. Ho says that the forthcoming implementation of Basle II regulations is encouraging more and more issuers to look at securitizations, and that the success of recent trial transactions in China suggests that the authorities might well be supportive of further deals.