Founded in 1966, the Asian Development Bank has a mandate to reduce the poverty of its developing member countries (DMCs) and improve the quality of life of their people. It currently has 67 members. Those eligible for assistance must be DMCs and be located in the region under ADB's purview, which includes areas of the Pacific as well as Asia. In 2009, the bank disbursed $13.2 billion in loans, $1.1 billion in grants and $267.2 million in technical assistance.
The development bank has been active for some time in securitization and activities that often serve as precursors to ABS (see side bar on p.28), but in the more recent past it has garnered the most attention by being attached to a couple of Kazakh transactions backed by diversified payment rights (DPRs), both of which were severely disrupted by trouble at the originating banks and powerful financial headwinds.
In an e-mail chat with ASR's Felipe Ossa, Stefan Hruschka, a senior investment specialist at the ADB, held forth on DPRs, microfinance, and the demise of the private-sector monoline industry in emerging markets, among other topics related to securitization. His frank discussion sheds light on the ADB's relationship to a business that has served as a political lightning rod in many parts of the world since the economic crisis hit overdrive in late 2008.
ASR: What role does the ADB see for securitization in Asia over the next few years and further into the future?
Hruschka: I expect the market to return on both the EM as well as the developed market side, but expect to see more straightforward transactions with a high degree of transparency. In an EM context that was already the case before the crisis, and that is one reason why I believe securitization has a future as an instrument for EM finance.
ASR: What is the ADB's view of the role of securitization in achieving its mandate?
Hruschka: The "mandate" of securitization is to make use of existing balance sheet items of future flows to enhance funding opportunities. As long as investors see value in these assets, they will accept them as backup for bonds and loans. This is bound to come back in the medium term. Having said that, we are seeing some deal ideas, but not many.
ASR:The ADB provided a guaranty on the $100 million, 2007-C tranche of Kazkommertsbank's (KKB) DPR program, and on the $100 million, 2006-A tranche of Alliance Bank's DPR shelf. KKB's program fully paid down by midsummer after acceleration triggers were tripped. Alliance's DPR deals, however, have been stumbling, as flows are insufficient to cover a quick amortization. The bank entered a restructuring of its corporate debt last year, with most creditors accepting the terms only this past March. Over this period, the debt service coverage ratio for Alliance's DPR program dipped below 1x for stretches of time. Unsurprisingly, Fitch Ratings has kept the unwrapped tranches at 'CC' from 'BBB-' at issuance. What lessons can be drawn from the Kazakh experience?
Hruschka: DPRs work! All transactions - to the best of my knowledge - were fully repaid except Alliance. [DPR bonds originated by BTA Bank, while not involving the ADB, also fully paid down in accelerated fashion by midsummer 2009.] Alliance DPR is still paying and was not subject to the restructuring of Alliance Bank's loan and bond portfolio. This in itself is a testament to the quality of the product. [As of March, the ADB tranche of Alliance DPR had $35.6 million outstanding.]
ASR:Are there other, broader lessons?
Hruschka: Structure well, get good legal advice [and] stick with the market leaders as much as you can, but even market leaders can get into trouble.
ASR:Would you work with a Kazakh bank again?
Hruschka: Yes, from a risk perspective. The product has performed very well as expected.
ASR:Moving on to microfinance - it's a huge business in India and other Asian countries, and in the past the ADB has spoken about using securitization to develop this crucial industry. Do you still believe securitization has a role to play in this sector?
Hruschka: Microfinance is a priority, and ADB will use a variety of products in this space. Securitization [can be employed] as a means toward an end, e.g., where funding is needed and securitization is a low-risk, low-cost vehicle to provide it. Alternatively, in introducing a new financial product to a market, [securitization can] ease the burden of product development and put the first benchmark into the market.
ASR: You say that the ADB would use "a variety of products" in microfinance. Are you open to acting as a guarantor as well?
Hruschka: Where structured finance is the right product to achieve a certain financing goal, ADB might participate in microfinance-related deals as guarantor. [That's] preferred because it helps get other financial institutions interested in the offering, thereby multiplying the number of participants getting a "taste" of EM finance. Given the large pipeline of possible transactions in various products, the "popularize a new product" approach would be attractive to ADB only if it is coupled with a very developmentally attractive use of funds. Microfinance would qualify.
ASR:How does the ADB view the question that faces many of the higher tier originators throughout emerging markets: cross-border issuance vs. domestic issuance? Does the ADB have a preference for one over the other?
Hruschka: Domestic markets are even more attractive than cross border [due to the] financial sector development angle, but also much harder to do. While ADB issues in a variety of EM currencies, it's not always easy to match up a given deal with an ADB currency issue.
ASR: Are certain countries more attractive for domestic issuance?
Hruschka: To be able to support a securitization deal, a certain legal infrastructure is necessary, which not all of our member countries have.
ASR:What about asset classes - which are higher on your wish list?
Hruschka: DPRs, other classes only if they have a very clear development or poverty reduction angle, i.e., MFI loans [are] more likely than bank loan CLOs, home-improvement loans for low-income housing more likely than mortgage loans [and so on]. Auto loans and consumer finance are less likely.
ASR:Given that private-sector monoline insurers are basically out of the emering market securitization game, save for the sporadic exception, do you think multilaterals will have to play a larger role in insuring securitizations?
Hruschka: Yes, by default. But even the more sophisticated and capital-markets-oriented DFI will not be able to pick up the whole slack.
ASR:It seems that every several years there's renewed talk of a DPR transaction from the Philippines. It's no wonder, as remittances form part of DPRs and Filipinos living abroad provide a sizable chunk of foreign exchange in the country. The country's Central Bank monitors these flows as a key ingredient of economic activity, estimating that $17 billion entered the Philippines in 2009, up 5.6% from the previous year as the global recovery was underway. Remarkably, this is roughly 10% of the country's GDP. But despite the securitization potential of remittances, my understanding is that a DPR transaction can't be done there because of certain restrictions imposed by local law. Is this true? What about existing asset securitizations?
Hruschka: ADB is following the discussion in the Philippines, but not driving it. My understanding is that the legal impediments are being discussed for future flow deals but that consumer assets can be securitized. [The country also completed a landmark RMBS last year.]
Asian Development Bank: Who's Eligible for Help
In addition to being located in Asia, a country must meet certain criteria to be eligible for ADB assistance. While these conditions can be superseded by a country's difficulty in obtaining financing elsewhere and other geographic considerations, in general the bank uses a classification system for its developing member countries (DMCs) in order to determine their eligibility to borrow from the Asian Development Fund (ADF) and to tap into the bank's ordinary capital resources (OCRs). The two main criteria to classify DMCs are gross national income per capita and sovereign creditworthiness. Countries eligible for ADF are in the lowest tier and currently include Afghanistan, Maldives, Nepal and Samoa, among a number of others. Those who can access a mix of ADF and OCR - the mid-tier - include countries such as Azerbaijan, Vietnam and Bangladesh. Those eligible for only OCR include Malaysia, Indonesia, Kazakhstan and the Philippines, as well as others. A country can graduate once it has weaned itself off development aid and established access to commercial capital. Former DMCs include Hong Kong, Singapore, Taiwan and South Korea. The ADB can still have a relationship with graduates by offering them a variety of services.
Indonesian Motorbikes and Philippine Homes
Apart from guaranteeing DPR bonds, the Asian Development Bank (ADB) has engaged in other activities related to securitization. Among them the bank provided partial guarantees for an Indonesian motorcycle-loan warehousing and helped finance the purchase of NPLs from a Philippine secondary mortgage company, which eventually paved the way for the country's first RMBS, according to Stefan Hruschka, senior investment specialist at the ADB.
In late 2004, the development bank made a $33 million, 6-year loan to Balikatan Housing Finance (BHF), a special-purpose vehicle set up and owned by Deutsche Bank Real Estate Global Opportunities (DBGO), an investment fund, and the National Housing Mortgage Finance Corporation (NHMFC). BHF was established to service and resolve a pool of Philippine NPLs that DBGO purchased in a bidding process from the NHMFC, a secondary mortgage company in the country. The pool had an aggregate outstanding principal balance of PHP13.45 billion ($301 million).
"This deal helped the National Home Mortgage Finance Corporation [NHMFC] clean up its balance sheet and open the door for its first performing mortgage securitization," Hruschka said.
The NHMFC's first RMBS was also a debut for the country. Closed in March 25, 2009, the deal amounted to PHP2.063 billion and had an 8.5-year final maturity. The lead was Standard Chartered. Collateral consisted of about 12,400 low to moderate delinquency loans, with average LTVs of 33% and average seasoning of 15 years. The NHFC was established to provide financing to the low-income housing sector. Prior to the deal, NHMFC's funding was limited to government agencies and support from the government.
The difficulty of placing a deal in the spring of 2009 won StanChart accolades for getting the transaction done. "It turned out that demand was sufficient to place the deal without a wrap, and ADB's support was not required," Hruschka said.
The development bank has also provided two partial credit guarantees and equity investment in an Indonesian motorcycle-loan warehousing with Deutsche Bank, which closed in July of 2006. The project originally envisioned Deutsche securitizing the loans, but nearly four years later the transaction remains a warehouse. A Deutsche spokesperson declined to comment on the deal.
The guarantees on the transaction, which was an undisclosed size, amounted to IDR36.87 billion ($4.1 million) and IDR53.50 billion. The deal also includes an equity investment of IDR909.50 million. The originator is PT Summit OTO Finance, a motorcycle finance company based in Jakarta, Indonesia, and part of Sumitomo Corporation Group.
This deal financed the acquisition and eventual securitization of two portfolios of motorcycle loans. In the project proposal, the ADB pointed to, among other things, the importance of small and medium-sized enterprises to the Indonesian economy in 2006, which represent about 50% of GDP.
Motorcycles are considered vital for most Indonesians to get around. They are a major alternative mode of transportation and are often more economical and efficient than public transport, according to the project document put out in 2006. The report also pointed out that Indonesia had a low motorcycle-user ratio, demonstrating that there was plenty of room for future growth, particularly as income levels rise.
Finance companies such as PT Summit are prohibited from taking deposits and therefore need to borrow from banks or issue bonds to meet their funding needs.