Prospects for international asset-backed deals from Asia have dwindled of late and ABS players in the region expect the market to stay quiet for some time.
Not long ago, securitization was expected to play a major role in helping Asian borrowers tap foreign funding for recapitalization and restructuring after the regional financial crisis. But outside Australia and Japan, the pipeline for international deals from Asia is shorter than predicted. This year, aside from deals funded through CBOs, only three term deals have been launched in the public market. While this is an improvement in volume terms on 1998, it is a disappointing total for those who hoped that international securitization would play a significant part in Asia's recovery.
Several factors are behind the surprisingly small volume, said sources. One oft-cited reason is the high level of domestic liquidity, particularly in South Korea and Thailand. Domestic financial institutions in those countries have begun to increase their lending and lower interest rates, making bank funding easier and cheaper, said sources. "Obviously if there's greater liquidity in the domestic market, securitization will not be the most attractive option, which is what we're seeing now," commented one ABS banker in Hong Kong.
Banker's hopes that Asian corporates would learn the lessons of the Asian crisis and make more effort to match their liabilities to their funding and diversify their funding sources both objectives that international securitization would help meet have also been dashed. The ease and cheapness of borrowing domestically certainly compared to international debt issuance have proved impossible to resist and Asian corporates have returned to their "bad old ways", said bankers.
Moreover, originators in the region are more focused on shoring up equity than trying to relieve their debt, added another banker. "A lot of companies don't need money now; a lot of Asia is de-leveraging in the form of IPOs, foreign direct investment, and strategic equity investment. The need for debt has come down and economies are not growing as fast as before [the crisis]."
Finally, the pool of potential issuers of global ABS deals in the region is now more limited. Banks such as the Export Import Bank of Korea with the resources and U.S. dollar-denominated assets best suited for securitization are in short supply, pointed out Calvin Wong, managing director at Standard & Poor's in Hong Kong, while currency swaps are either very expensive or not available for longer maturities. "Deal issuance is not as high as expected. Outside Japan and Australia, we would like to see more growth in the rest of Asia," he acknowledged.
On the bright side, domestic ABS issuance in Asia is heating up. Investor demand for highly rated securities is high in both Korea and Thailand and asset backeds should be ideal investments. "There have been seven domestic deals done in Korea, which should tell you something," commented one source. And though international houses cannot underwrite Korean domestic deals, they can still serve in an advisory role, such as Chase did for a recent auto loan-backed deal for Daewoo Financial Services Corp.
Going forward, global ABS transactions from Asia will surface once liquidity dries up, predicted a structured finance head. "The countries that will come back first are those that will need to fund exports and where domestic liquidity will dry up soonest. Sooner or later people will need to diversify funding and they'll return to the international markets, but it will take time," he concluded. VC/MD