Issuance last week of a 142.5 million (US$174.8 million) CMBS by Ascendas Real Estate Investment Trust (A-REIT) provided further evidence of a swelling offshore appetite for Singaporean property-backed paper.
Arranged jointly by JPMorgan Securities and Overseas-Chinese Banking Corp., A-REIT's debut securitization priced at 33 basis points over Euribor and came off the Emerald Assets SPV. Asendas-MGM Funds Limited set up the REIT in 2002.
The tight pricing came as a surprise to many, as it was only one point outside the US$215 million offering from fellow Singaporean REIT, CapitaMall Trust (CMT) (see ASR p.18, 8/2).
Led by HSBC, CMT was expected to price between five basis points and seven points inside A-REIT. One reason was that the quality of CMT's collateral - income from leases in busy shopping malls - was considered safer than the industrial and business properties packaged in A-REIT, the first time such assets had backed a Singapore deal.
Secondly, CMT - and its parent company CapitaLand - are familiar names to European and Asian investors. A-REIT might reasonably have expected to offer a little more spread to investors as a first-ime issuer.
That said, Standard & Poor's pointed out the deal had the most diverse portfolio for a CMBS issued from ex-Japan Asia. And, despite the risks typically associated with industrial properties, this was mitigated to some extent by the quality of tenants - including Honeywell and Siemens - many of whom have leases that go beyond the five-year maturity of the transaction.
In addition, two weeks of European roadshows was evidently time well spent. "The senior executives [from A-REIT] that made presentations were very well received by investors," a well-placed source said. "A-REIT is seen to be very professional with experienced managers with good track records."
The bonds - rated triple-A by all three major agencies - were 2.5 times oversubscribed. Twelve accounts, some new to Singaporean deals, participated. European buyers bought 70%, with the rest staying in Asia.
Given A-REIT's allocation, the decision to issue in euros might have seemed like a smart move. In reality, it probably made little difference. CMT's deal was denominated in dollars, and Europeans still grabbed 80%.
Demand on that deal was even greater - according to the leads there were over US$1 billion of orders. With such strong appetite, it might be reasonable to ask whether CMT could have priced inside the 32 basis points over Libor it garnered. Even so, it set a new benchmark for Singaporean CMBS.
It is no wonder that European buyers like Singaporean paper, the well-placed source said. "Singapore has a mature and transparent property market," he said. "For investors, the Singapore market offers an opportunity to increase yield without a significant increase in risk as triple-A European CMBS are pricing at around 22 basis points over Libor/Euribor"
Pricing has definitely tightened against European paper. When CapitaCommercial Trust - the office REIT established by CapitaLand - issued a US$341 million CMBS in March at 45 basis points, the difference between Singaporean and European paper was around 18 points. Now it is closer to 10 points.
The source believes Singaporean CMBS is comparable to where Australian RMBS was a couple of years ago. If Singapore deals follow the Aussie track, spreads are likely to come in further as investors become more comfortable with the product.
A-REIT is expected to return to market within the next six months to finance new property acquisitions.
Asian employee action
Elsewhere in Asia, it has emerged that JPMorgan Securities is transferring SJ Hong to Hong Kong from Korea, where she had headed Bank One's efforts for that country, including a deal for Kookmin Card. She will lead a team of three, with Korea the likely focus, a source said (see ASR p.18, 8/2).
Meanwhile, officials at Credit Suisse First Boston countered the widespread rumors that it is cutting back its securitization presence in ex-Japan Asia following Greg Park's departure as head of Asian ABS. As reported, Park is not going to be replaced.
Instead, Jon Pratt, the bank's head of debt capital markets in the region, has taken over direct responsibility for ABS. The Hong Kong-based DCM team has added three staff recently, whom one CSFB official said will also support the securitization effort.
"The new arrangement will allow for a more integrated platform and allow the group to better leverage off credit ratings expertise and resources throughout the region, including Japan and Australia," the official added.
The bank has apparently not lost any existing mandates as a result of Park leaving. They include a US$1 billion primary CDO for Korea's Ministry of Commerce, Industry and Energy, on a joint mandate with JPMorgan (see ASR, 4/5, p. 19).
S&P hails birth of "true Asia-Pacific market"
According to the latest research from Standard & Poor's, securitization in ex-Japan Asia is now truly a regional phenomenon, after having been restricted to a few pockets of the continent for many years.
"In the early years, so-called Asian securitization was really a misnomer as deal flows came from only one or two countries," says S&P structured finance analyst Diane Lam. "In 2002 and 2003, for instance, the market was mostly limited to Korean credit card securitizations."
In the past 12 months, however, activity has fanned out into Taiwan, Hong Kong, Korea, Thailand, Malaysia, India and Singapore.
"Securitization is now considered a must-have component of the fixed-income product offerings for Asian investors," Lam argues. "Moreover, financial institutions, finance companies and insurance companies have begun to review securitization as a risk-management tool."
According to S&P, public issuance out of the region exceeds US$46 billion. The true volume would be significantly higher if private and conduit deals could be quantified.
One particularly encouraging development is the emergence of domestic markets. For countries such as Malaysia and Thailand, the scarcity of swaps has made it difficult to do cross-border deals. In addition, growing domestic liquidity and investor demand makes local issuance increasingly an option.
In 2004, domestic deals are likely to exceed cross-border volumes, a trend S&P expects will hold in the short to medium term.
To date, consumer finance receivables has been the biggest asset class, although 2004 has seen property transactions perform strongly in Malaysia, Taiwan and Singapore especially.
Given the level of issuance to come out of Singapore so far this year, it is tempting to believe it will rival Korea as the main cross-border market. Lam, however, stressed that Korea will retain the top spot.
"I do not think Singapore is overtaking Korea, not yet," she says. "There have been a couple of larger private deals in Korea, so I still think Korea is king. In addition, there a few more Korean cross-border deals being prepped for the fourth quarter."
After a quiet few years, Hong Kong is showing signs of bouncing back. The most notable transaction in 2004 was the government's HK$6 billion (US$768 million) tunnels securitization. However, the imminent establishment of the Housing Agency's REIT could stimulate the securitization market, although Lam believes it might benefit China as much as Hong Kong.
"While Hong Kong is a tier 1 city, the cities in the People's Republic such as Shanghai and Beijing offer very attractive longer-term prospects to become high-profile cities with increased demand for quality infrastructure," she explains. "It is possible that property developers may choose to use REITs and CMBS to source attractive funding to finance high-growth opportunities outside Hong Kong."
China remains the Holy Grail for securitization professionals. Although the issuance of a couple of nonperforming loan transactions has been encouraging, it's still very much a case of untapped potential. Putting a timeframe on realizing the potential has proved nearly impossible, yet Lam is bullish.
"When you look at the successful markets in the region - Japan, Korea, Hong Kong and Singapore - size is a common feature, so naturally China comes to mind," believes Lam. "It will take a lot of hard work, experimentation, but I feel China will push ahead at a pace that may surprise all of us."
Lam believes there will be cross-border and domestic opportunities, citing the emergence of a sizeable domestic bond market as cause for optimism. Nonetheless, Lam agrees that the timing of China's emergence depends on how quickly regulators are prepared to implement rules and bring in international expertise to ensure the market develops in an orderly manner.
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