Diane Lam's recent report for Standard & Poor's on the Asian securitization market came to a sobering but not completely dismal conclusion that, although macro financial and economic troubles continue, there are some rays of hope. "Collectively issuance in South Korea, Singapore, Hong Kong and Taiwan is coming at a far slower pace than in previous years because of slower growth of consumer financial assets and higher levels of bad debts and bankruptcies," said Lam, a director in S&P's structured finance group, in the report.

Lam points to two areas of future prospective growth: the development of Taiwan's market and synthetic CDO activity. First, although the synthetic CDO market has taken a summer pause, it may resume in earnest because of the high level of interest among Asian investors. Singapore is where CDO activity is focused. Both of these trends have been well documented in ASR.

In Taiwan, following on from the CLO transaction in February 2003, Lam said that the market is looking at other asset classes such as residential mortgage loans, credit cards and even trade receivables.

"Over the last two years, we have seen a lot of resources being directed toward Taiwan," said Paul Kruger, partner in the securitization group at Clifford Chance. "However to date, there have been very few deals that have come to market. We are currently working on two deals, but it might just be that Taiwan will not be as big as some people initially thought. Compared with Korea, we do not see the same level of interest from originators in securitization as a core financing strategy."

Hong Kong....

The ABS market still remains quiet in Hong Kong where the consumer credit situation continues to deteriorate. Unemployment continues to rise and property prices fall (these have dropped 65% of peak values experienced before the 1997 Asian financial crises), and an increased percentage of mortgage loans are in negative equity with signs that the increasing number of personal bankruptcies have yet to taper off. This has had its effect on securitization issuance, in

particular mortgage loans and consumer assets, according to the S&P report.

Even the Hong Kong Mortgage Corporation (HKMC) securitization program, Bauhinia MBS Ltd., has not used the securitization route this year. This is because the program has not purchased new volumes, and also has used other more advantageous funding methods, such as NIP (note issuance program). Lam pointed to the retail investors, which HKMC was instrumental in building, and who like investing in the notes.

But there is a potential bright spot, as there is much talk of the Hong Kong government pursuing a securitization strategy.

"There are discussions on government privatization, and securitization can be a form of acquisition financing," Lam said. "Securitization is one potential actively being explored, because the Hong Kong government is looking to trim down assets and to raise cash to support funding needs and to reduce the deficit."

"The current fiscal situation could be improved by looking at securitizing steady cash flow assets," she added. "For example, tunnel revenues is one which comes readily to mind. Others may include divesting of real estate holdings outright, or raising low- cost debt using commercial real estate securitization."

It would definitely be a welcome boost to securitization practitioners if the government considers securitization techniques. Hong Kong was a leading center for securitization prior to the Asian crisis, and the government could put securitization back on the map for Hong Kong.

South Korea....

This year has also seen the consumer credit crises badly affect the South Korean credit card market. This leads S&P's Lam to conclude that the heightened concerns on the bad debt levels of credit cards have yet to dissipate, and the political flare-ups with North Korea could mean a lower issuance activity for the remainder of 2003.

The timing for the Samsung Life's second RMBS deal is currently being reviewed, and it is doubtful whether it will come to market before the year's end. However, it seems that there is another RMBS transaction in the pipeline from a first-time Korean issuer, which is expected to come to market before the end of the year.

As Nancy Fox, managing director at Ambac, responsible for Ambac's Asian market (with the exclusion of Japan), explained, RMBS deals are more complex transactions. "The big consideration for cross-border transactions is the cross-currency swap," she said. "This is especially relevant for RMBS deals where the legal maturity of deals often runs into 20 and 30 years, and this requires a very long-term commitment from the swap counterparty provider. Although pre-payment rates usually mean that it is more than likely for RMBS deals to have a weighted average maturity of four

to five years."

The real issue at the moment, Fox said, is that the U.S. dollar/won cross-currency swap market has moved from being attractive to now unattractive. "This is due to the fact that a lot of corporate issuance out of Korea has used up the current demand, so the timing for any future transaction will very much depend on the attractiveness of the cross-currency swap," Fox added.

With regard to 2004, Fox is confident in a pickup of issuance in South Korea, citing two main reasons: "A lot of issuers this year have been focused on restructuring which has been very time-consuming, and has taken the focus away from deal issuance," she continued. "Secondly, the credit bubble will have been digested by next year, and as losses are written off, issuers will be ready to write business again. Therefore, in the first quarter of next year originators will once again be focused on writing new business, and consequently the ABS market should reopen."

Although, it remains to be seen how or if the cross-currency market shapes up, but 2004 should be a good year for issuance, with the emergence of more conservative structures across all asset classes, Fox explained.

Paul Kruger at Clifford Chance sees some activity on the horizon, noting, "Undoubtedly the market in South Korea has been a lot slower this year than everyone thought it would be. But on the bright side we are working on a couple of public deals, and we hope that these will come to market in the not-too-distance future."

In terms of other areas of activity, Ambac's Fox also highlights Taiwan, where cross-border deals and a number of domestic deals have already been mandated, as well as Hong Kong, where there is a lot of discussion on infrastructure-type deals. "I would describe this year as having been relatively quiet, probably disappointing, but, considering the SARS virus, which had a great destabilizing effect, there has been a good recovery, and we expect the first quarter of 2004 to show more activity," she added.

S&P's Lam said that it is difficult to see at this stage whether issuance levels will pick up in 2004. She noted that it is likely that some deals will be seen in Korea and Taiwan. "But in Korea, a lot depends on the ability of the investors to see some improvement in credit quality and risk management systems in the card companies," she said. "Singapore and HK should also see some activity."

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