Securitisation - a guarded optimism towards future potential
Up until the end of 2002, many were extolling the triumph of Asian securitisation. This year has not lived up to expectations. As part of its ongoing series of Round tables, ALB has brought together leaders of Asia's securitisation industry to discuss the stalled development and 'cautious optimism' for the future
AS Securitisation involves a lot of activity, but lawyers come at the end of this rather than the beginning. I'd like to hear from those of you at the forefront as to what is happening and where you see the trends for the coming years.
TS For the last few years, the securitisation hotspot and the most reliable country in the region has been Korea. However this year Korea is also demonstrating that it is subject to pressures. I guess because of last year's regulatory changes, the amount of growth in the consumer credit market has been constrained. Companies have used other forms of funding, like unsecured capital market funding or bank funding, rather than resorting to more asset-backed transactions. Korea remains relatively liquid and the borrowing requirements aren't there.
It's fair to say that we've seen some signs of stabilisation in the Korean market and there are some signs that the credit crunch is starting to dissipate.
An area that we haven't seen much activity in Korea is on the mortgage side. The banks are probably looking at their mortgages as a suitable form of collateral to do ABS transactions. So, Korea will probably continue to be the strongest country here, notwithstanding last year's problems.
BM Looking back at the end of 2002, there was a lot of noise about how great the market had turned out to be and a lot of optimism for the future. 2002 saw the first deals in Malaysia and Thailand and new legislation in Taiwan. The highlight as far as FITCH was concerned was that we had repeat issuers for the first time in Korea and Singapore. This builds confidence with investors because they know that any time spent understanding a particular asset class will be rewarded with multiple opportunities to invest. Undoubtedly, this year has been disappointing. With the liquidity crisis coming and the consumer finance bubble bursting in Korea a lot of issuance has stopped.
I think the development of domestic markets is the key driver for growth in the future - certainly in Malaysia and Taiwan, and FITCH is seeing a lot of activity in Thailand and India too.
SA The first securitisation deals in Asia were around 1994. However, since then the markets haven't had the explosive volumes that were expected, with Korea being an exception perhaps.
It is interesting to note that in 2001/02 domestic issuance in Korea was equivalent to about US$30bn. What that tells you is that there is a developing investor and issuer base in that domestic market. Companies are coming across a myriad of new securitisation techniques, and this gives them confidence to do more complex transactions in the international market. Unless we have similar levels of domestic activity in other countries we will unlikely see any international transactions.
Without the development of regulatory, accounting, and legal frameworks that come from the development of the domestic market, cross border transactions will be limited.
AS One of the initiatives currently underway is the development of a securitisation forum. This would examine some of the impediments, which tend to be accounting and regulatory issues, as well as looking at other ways to develop securitisation.
SA Problems have arisen from the fact that there's been a process of change in relation to international accounting standards and their application to securitisation. International accounting standards are still changing. This is affecting issuance - particularly from non-bank issuers. For banks, regulatory capital is more important than off-balance sheet treatment, whereas for corporate institutions getting the right accounting treatment is significantly more important.
SC At the Hong Kong Mortgage Corporation, we have two programs - a back-to-back guaranteed program set up in October '99 and our Bauhinia MBS program launched in 2001. Both programs have been well received and we've been doing many issuances. However, the process has been very time consuming. Accounting-wise, SAP 32, covering the subsidiary concept, has been absorbing a lot of energy in discussions between Hong Kong accountants. In 2000 we urged the Hong Kong Society of Accountants to look at the practices adopted by the US and the UK in relation to the SPV principle. However, transparency was an issue for the accountants.We hope they reconsider, as this could limit the development of the MBS market in Hong Kong.
Prospectus requirements can be challenging. When you are doing note issues, the window of opportunity is narrow. If you have to spend up to three-weeks on prospectus requirements, you can miss the market. These requirements are based on the English Companies Act of 1929. At that time, there weren't things like debt issues - so we're fitting a square peg into a round hole.
We have been raising our concerns and the SFC has started a three-phase reform program. Simplifying the prospectus has been recommended, and another thing that has been pointed out is reviewing the definition of debenture.
RM The reform process has made a difference in Hong Kong. With the dual prospectus regime, we're beginning to see structured note programs come through. We're seeing the introduction of Euro-styled note issuances here, and the SFC in the administration of the new regime has proved very helpful.
So far, the investment banks have been the ones involved in the issuance programme, but I think more corporates will become involved. Hong Kong can only benefit from the hard work.
SC We're very pleased to see efforts being made. And these initiatives tie in with the core mission of the HKMC - to help develop and deepen the debt market here.
DL Securitisation developments in Hong Kong have been very positive and have occurred at a much faster pace than in other countries in the region.
An emerging jurisdiction, in which Standard & Poor's is very much involved, is Taiwan. Legislation was enacted there only recently, but already there is a need for improvement and redrafting. The laws and regulatory framework in those markets that have already been tested should stand as a starting point for procedure and definition. This is an area where it's critical for legal professionals and accountants to have an input in shaping further improvements.
From a ratings agencies perspective, we would like to see more transactions coming to Hong Kong and Singapore. Some of the activities here, like an expansion in the retail sector by various waves of product, are quite positive. One product we haven't seen in Hong Kong is the start of the CP market, and I think that would be a positive move.
SA This depends on the size of the market. If the market is small, and thus not liquid, then the issue of commercial paper by an Asset Backed Commercial Paper conduit becomes problematic. All such conduits need to be supported by liquidity facilities, and if there is a large disruption in the market, those facilities would be overdrawn. Another issue is that under current Hong Kong banking ordinance guidelines, the provision of liquidity facilities to a conduit is 50% risk-weighted. In all other jurisdictions, it's currently zero risk-weighted.
DL In Singapore, the existing CP market has been very successful and well placed. However, I think if we are to put these programs together there must be intensive discussions.
SA These markets need to be developed in conjunction with regulators, accounting bodies and ratings agencies.
The HKMC and HSBC are very focused on putting together a forum akin to the European or American securitisation forums. For things to change we need to create a collective voice of vested parties. Regional accounting bodies have adopted IAS 27 and are adopting SIC 12, which for securitisation are problematic. While consulting the broader financial industry, however, they have not typically taken account of the views of the securitisation industry
BM It can still be extremely difficult for a securitisation transaction to be completed in many Asian markets. One of the things rating agencies look for is legal certainty. We need this as a basis to make comparisons between the transactions rated on the international scale in Hong Kong with, for example, one done in the UK.
Each transaction tends to be unique and requires detailed analysis. We would welcome a securitisation forum to assist in navigating some of the hazards in getting a deal completed in Asia.
RM It's interesting to note the amount of legislation that was passed in Korea following the crisis in 1997. As a consequence, legal certainty is now available there.
Another interesting fact is the overhang of non-performing loans. There are a lot of banks, which are looking at whether securitisation provides a solution. I'd be interested to hear what other people think about the situation with NPLs.
DL NPL securitisation is a very specialised. Now there are specialists coming in to actually buy NPLs, especially in the case of Korea. We think this has added a significant amount of value, especially in the area of bankruptcy proceedings, bankruptcy reforms and secured credit rights - all of which could ultimately benefit securitisation. Can we look at NPL securitisation in Korea? Quite possibly. China? Maybe. The foundations are built there as well with NPL disposition, and already there have been some improvements such as trust laws.
DK As we look around the region, we are experiencing a broader diversification of asset classes that we have been asked to look at by clients. In Korea, we are looking at more mortgage products, mortgage assets and whole loan sales. We're seeing more interest in India as well-- both from the domestic side as well as a cross-border side. People are starting to widen the spectrum of what they're looking at. In terms of asset classes, it helps if we could participate in the jurisdiction and see what some of the hurdles are.
SA It would also be helpful if we talked about the positive aspects.
We've seen specific securitisation laws passed in many countries that don't have the UK law system. This is extremely positive - every year we see another country added to the list of countries that have an awareness of the need to use securitisation technology. And I think it is only a matter of time before we see this in China.
Considering the liquidity in the banking sector, the number and type of deals done here are pretty good. We saw one of the first consumer asset synthetic transactions done in Hong Kong, and we've seen the issuance of true mortgage-backed securities, credit card ABS and commercial mortgage backed securities here. In Malaysia, we've seen about nine transactions over the last couple of years and that is pretty good for a relatively new market where the level of awareness of the benefits and complexities of securitisation transactions is still being developed.
However I can't emphasise enough, the need to develop an investor base in the region - without that we are not going to fully develop an Asian securitisation market.
Adrienne Showering - Mallesons Stephens Jaques
I think we're going to be seeing increased activity over the next couple of years, including more synthetics in the banking area, credit link deals and an increasing move to accessing the residential market
Richard Mazzochi - Mallesons Stephens Jaques
It would be a mistake to be pessimistic. We're in the middle of dramatic changes in legislation across the region and in the way the market is developing
Susie Cheung - Hong Kong Mortgage Corporation
We would like to see some discussion on the accounting issues and a pooling of resources. The fundamentals have to be in place before the market can takeoff
Tom Saywell - Merrill Lynch
I think the concept of lobbying the people making the decisions about securitisation is important. Having some type of body that can do this a coordinated basis makes a lot of sense
Sarwar Ahmad - HSBC
It's time we took securitisation in Asia from being a cottage industry to something much bigger. We're focusing on developing an investor base and ... developing structured capital markets
Kyson Ho - HSBC
For Hong Kong, I think the future of securitisation is very positive. One possible source of momentum comes from the government showing an interest in securitising its assets
Diane Lam - Standards & Poor's
I agree the domestic market is critical. It gives everyone the opportunity to test and find an existing base to work through complex issues
Ben McCarthy - FITCH Ratings
The real story is the domestic market - you need to be able to see the domestic markets build up before cross-border transactions can take place in any sort of volume