Despite the negative sentiment surrounding the Korean consumer credit sector, there are still market participants that are more bullish on a Korean securitization revival than they are on the possibilities of an emergence of an active securitization market in Hong Kong. Although the Hong Kong government has given a positive endorsement to securitization, they say they will have to see securitization being utilized, before they actually believe it!

The Hong Kong securitization market has been sluggish for a number of years, with only a few transactions completed last year. In March of last year, the Hong Kong Mortgage Corporation launched its inaugural issue from its securitization programme Bauhinia MBS Ltd, and there was also a credit card deal by Nihon Hong Kong. Market participants point to the fact that corporates still benefit from attractive commercial banking rates and that the banks themselves are flush with cash, therefore there is no need to access the securitization market.

"At the moment Hong Kong is a very over-banked market with too many deposits chasing very few lending opportunities," said Min Ye, managing director at Moody's Investors Service. There are other cheaper sources of funding available other than securitization, and strong liquidity exists in these other markets, and therefore not much need for securitization.

"Going forward we could see a situation where if economic growth picks up in the region, and specifically in Hong Kong, banks might look for opportunities and investments in China. In that case as they use up capital, they may have a further incentive to use securitization, and free up some of their capital base."

However, despite indications and talk from the government that securitization would be considered as a means for increasing revenues and addressing the budget deficit, "Recently, the opportunities for securitization have been somewhat limited in Hong Kong," said Stephen Roith, partner in the securitization group at Clifford Chance. "There is the Hong Kong Mortgage Corporation, with its existing mortgage securitization programmes, but aside from that it remains to be seen how serious the government is on using securitization."

Raj Shourie, managing director at Deutsche Bank, says that the Hong Kong government has made positive moves, and it could create a potential momentum for the securitization market. However, he thinks it is unlikely that we will see any deals emerging this year. "Potentially, government assets could create quite a large new asset class which would assist the government's funding objectives," he added.

If the government was to utilize securitization, there is some speculation on the possible assets that could be securitized, which include commercial property, parking lots, civil servant loans and mortgages.

"The Hong Kong government has been considering ways of divesting or securitizing various types of assets to raise funds," said Roith. "These include government interests in commercial property, car parks, airport revenues and toll road and cross- tunnel receipts. The Securities and Futures Commission is also in the process of introducing the REIT to Hong Kong, and this could be another possible divestment tool."

Roith points to the sizeable body of securitization and structured finance expertise available in Hong Kong, in both investment banks and international law firms, that would all like to see securitization employed more frequently on Hong Kong-based transactions. "Perhaps the Hong Kong government's ever expanding fiscal deficit will create new opportunities," he said.

Accounting issues....

However, there are outstanding issues which still could hamper the securitization market outside of the government sphere. "Under current new proposals, Hong Kong accounting standard SSAP 32 would be adopted in local company law and so made applicable to Hong Kong companies," explained Roith. "This would be consistent with the International Accounting Standards and in particular with IAS 27 and SIC-12, which makes it difficult for companies to obtain off-balance sheet treatment in a securitization."

He adds that IAS 27 has already been incorporated within general Hong Kong accounting standards by SSAP 32, but now the proposals focus on including the standard within the Hong Kong company law.

"A securitization working group was formed under the auspices of the Hong Kong Capital Markets Association, and we have met with bankers, accountants, the HKMC and other law firms to discuss concerns, since a more securitization- friendly accounting regime would obviously help to restart the market in Hong Kong," said Roith

There has also been talk for some time of the possibility of another asset class on the horizon - the securitization of negative equity mortgages. As this problem becomes more acute in Hong Kong, some say that banks would like to see these types of assets being securitized. For this type of product, getting the off-balance sheet treatment might be less of a motivation, compared to selling off this type of risk.

The homeowners' negative equity situation stems from the sharp drop in property prices after the 1997 Asian crisis. According to the Hong Kong Monetary Authority Survey, at the end of September 2002 mortgage loans in negative equity stood at HK118 billion ($15 billion), 22% of the total outstanding mortgage loan amount.

Moody's says that several programs were set up to deal with negative equity during 2002. These programs allow the homeowner to refinance their mortgages with a current loan to equity ratio of 140%. Moody's said that these could then be repackaged and refinanced as mortgage loans.

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