When Linklaters poached the highly rated securitisation team of Paul Kruger and Mary Matson from Clifford Chance earlier this year, it was notable that CC didn't talk of replacing them - and still doesn't.

"They were a highly specialised team and we're not looking to bring in a specialised team of that kind at the moment," confirms Stephen Roith, head of CC's Hong Kong capital markets team. "We're looking to develop a more generalised capability that fits with the amount of business that we see being available and the profitability of that business."

Roith's implication that there isn't that much securitisation work on the ground is something that has other international law firms quietly nodding. Frankly, securitisation has been a bit of a damp squib for a lot of Hong Kong operations.

"It's not been as busy as in previous years here," confirms Patrick Lines, finance partner at Freshfields. "But then it's been patchy in development here ever since it started."

Hong Kong has never really been the securitisation hotspot that lawyers once thought it would be, due to a number of reasons. "In Hong Kong the banks and property companies haven't wanted to get rid of their assets - they have wanted to sit on them," says Roith, explaining why the local market never got underway.

Others point to regulatory inaction and excessive debt liquidity. "In Hong Kong there are masses of cheap liquidity - so why would you use securitisation?" asks Lines.

And perhaps the biggest blow to a Hong Kong securitisation market was the establishment of the Hong Kong Mortgage Corporation (HKMC), which buys mortgages and then sells them as mortgage-backed securities (MBS).

While this has the laudable aims of providing a reliable source of liquidity and promoting home ownership, it also sucked up all the MBS transactions.

This is lucky for some, such as Cayman Island firm Walkers - which acts on some HKMC transactions that have an offshore element. But it's also unlucky for others that don't have a relationship with the group.

Walkers is one of the offshore firms that has worked the securitisation market to their advantage through the peaks and troughs. This is because many securitisation transactions are packaged as an offshore deal because of the favourable tax implications.

John Rogers and Vicki Hazelden at Walkers are currently working on an RMBS (residential mortgage backed securities) transaction for a Taiwanese originator and report that the firm has seen increased deal flow in Hong Kong and Singapore.

"In Korea, Japan and Taiwan our experience has been with private sector assets," says Rogers. "And the Hong Kong and Singapore REIT and CMBS (commercial mortgage backed securities) markets are showing an increase in private sector assets - we're hopeful that those markets will show real growth over the next 12-24 months."

Harriet Unger at offshore firm Maples and Calder has a similar tale to tell. "We've been involved in transactions throughout the region this year from Korea through to Indonesia," she says. This included the Fortune REIT CMBS deal arranged by DBS and HSBC in July that was Hong Kong's first CMBS deal.

Bright spots
But while deal flow has been low, hopes remain high for the Asian market because it is a developing market and has the most potential when compared to the US and Europe.

"Asia only represents US$100bn of the US$1.2trn of ABS issues in 2004," says Frances Woo, managing partner at Appleby Spurling Hunter's Hong Kong office. "The US is saturated and so the potential is in Asia, but for a lot of people it's a case of waiting for the deals to happen."

Of that US$100bn, most of the activity has been coming out of Korea and Japan - the two bright spots of the Asian securitisation market.

In Korea, the ability to dispose of non-performing loans via securitisation provided a boost to the domestic market. "The Korean banks over-extended themselves and they had to work out the balance sheets and do something about them," says Roith. "This is a way of getting rid of loans."

According to Korea's Financial Supervisory Service, in 1999 the securitisation of NPLs represented 42% of the total volume of securitisations. While this has now dropped off, securitisation remains popular as a means to obtain low cost financing.

"The Korean securitisation market appears to be a lot stronger this calendar year and there seem to be a lot more deals coming through," says Rogers.

Others agree with Rogers' view. "The Korean market has been strong and that's continued to some extent although there were fewer deals this year," says Lines.

It's a similar tale in Japan where the highly regarded Linklaters team of Paul Kruger and Mary Matson are active. A long downturn has meant that banks and real estate companies are looking to raise funds and securitisation is the tool they're using.

The reality is, however, that in both these jurisdictions local firms have been quick to pick up on sophisticated securitisation techniques and then it all comes down to pricing.

"You develop the know-how but the domestic firms are good at picking up that know-how and their fees are lower," says Woo.

The aggressive pricing in some markets has seen some international firms bow out gracefully - particularly from domestic markets. "Some pricing levels have come down to the point that we're not willing to go to," says Lines. "We focus on the cross-border market where you are competing with international firms, not local ones."

Even offshore firms haven't been immune. "Like all market participants we've been affected by the tightening of the market as the more tried and tested structures become commoditised," says Unger. "Clients in the region are particularly cost conscious and we are frequently in competitive bidding situations."

Offshore firms also focus their energies on working on deals that will attract institutional investors. "It's about investor perception," says Woo. "If you're targeting institutional investors then there is more likelihood of using a Cayman or BVI structure because for institutional investors that takes out the country risk.

"However, if you're targeting domestic investors then they understand the country risk and an offshore structure is less likely to be required."

Chinese hopes
The great hope for the securitisation market - like most other economic sectors in Asia - is China.

Up till now China has lacked the regulatory regime required for securitisations, but the PRC government has flagged up two pilot projects which will see China Development Bank and China Construction Bank push through the first securitisations in the country.
Reports indicate that CCB plans to sell more than US$371m worth of mortgage-backed securities while the China Development Bank, a policy lender specialising in infrastructure financing, has said it intends to issue securities worth US$645m based on 62 loans it has made to 12 industries.
Xu Sheng Yang at King & Wood is leading the work on the CCB deal and describes it as groundbreaking for the firms involved. "This is the first time that we've drafted most of the documentation on a securitisation and that's where the challenge is," he says. There's an added difficulty in that there are certain words and concepts in UK/US securities law that don't exist in Chinese law. "We have to find out how to express it in a different way," he says.
The CCB deal essentially creates a new platform for securitisations, which relies on a special purpose trust. Prior to this, Chinese securitisations only happened as private placements for less than 200 people and trading them as securities was difficult and unregulated.
"In the CCB deal investors will be able to trade their investment as securities," says Yang. "That's a big step forward."
Yang says that there is a lot of interest in the CCB deal. "This deal is acting as a demonstration for other banks to follow," he says. "There are a lot of these deals in the pipeline."
While these are domestic deals, the internationals are watching them with interest. Freshfields' Lines, who is also advising on the CCB deal, says: "What's important is that these are domestic deals - they will be RMB denominated and for domestic investors. It's a great development because generally you need a strong domestic market before you can get cross border deals."
Roith is less hopeful: "I have to say that China has been far more interesting for every other kind of work than securitisation. I mean these are two pilot projects that have taken months to get done on low legal fees."
Ironically, while Freshfields and the ilk are keeping an eye on China, the offshore firms have practically been cut out of the market by a ruling that does not permit an offshore issuer.
"In the PRC there are two ways of doing a securitisation - one is domestic RMB denominated and the other is offshore - unfortunately it's illegal to do it the second way," says Rogers. "It may be possible for a Chinese company that has offshore receivables - but we're not sure."
In any case, lawyers such as Woo think that a PRC securitisation bonanza could be a long way off. "In the PRC, even before we start seeing more complex bond issues, there needs to be a deeper bond market and it's not there yet," she says. "Maybe with these deals we are putting the cart before the horse."