The Sri Lankan government used its recent budget to chop the rate of stamp duty charged to transfers of assets into securitization SPVs or trusts from 2% to 0.5%, in what market pros in Colombo hope will be the first step in developing the local securitization market
It may be a small step, but it is a demonstration that Sri Lanka's politicians and officials are being convinced of the merits of ABS, said Ravi Abeysuriya, chief executive of Duff & Phelps Credit Rating Lanka, a rating agency owned by DCR in Chicago, the International Finance Corp. (IFC), the Central Bank of Sri Lanka and several local financial institutions.
The market has seen about 1.5 billion Sri Lankan rupees ($20 million) worth of privately placed lease-backed quasi-securitizations via the IFC and local banks, but several problems stand in the way of developing a wider, "true" securitization market.
Fiscal problems remain and mortgage securitizations are ruled out because of what Abeysuriya called "archaic rent control acts" which make the transfer of mortgages into a securitization vehicle impossible.
There is also a lack of clarity about what would happen in the event of bankruptcy of an originator - it may be that a court would claw back assets transferred into a trust or SPV. Because it has been asked to examine a deal where there are questions about the solvency of the originator, DCR Lanka is awaiting legal opinions about the status of bankruptcy remoteness in Sri Lankan law.
However, Abeysuriya said, that the problems should not overshadow the impetus towards developing a functioning securitization market. In the lease sector, increasing competition means that lease companies need to bring down their cost of funds, while in the mortgage market, lenders have a similar need for cheap funding.
The government is aware of this and has been convinced that securitization will help, Abeysuriya said, adding, however, that finally getting the correct legislation and fiscal environment will take a year or two.