The securitization market in the Philippines has not been very active, but a number of deals are expected in the near future. A workers remittance transaction is being prepared which will be placed into a Citibank conduit. Two domestic consumer finance transactions denominated in Philippine pesos are expected to close by the end of the year.
Hypovereinsbank is preparing a deal that will package the cashflow owed by the Philippines Department of Transportation and Communications (DoTC) to a consortium of contractors that built a section of Manila's MRT rail system. The deal will securitize leases the DoTC will pay to the constructors. The transaction is expected to be U.S. $175 million and, if it goes ahead, will be the first deal in Asia Pacific to securitize revenues from a build, lease and transfer contract.
The deal may use a monoline wrap or be sold to investors looking for non-investment grade paper, because it is unlikely that the transaction could get a stand alone investment grade rating. The main risk is that of the Republic of the Philippines, rated Ba1/BB+ (Moody's Investors Service/Standard & Poor's). HVB is reported to be also working on another ABS transaction and at least one of the forthcoming consumer finance transactions.
The government of the Philippines is also considering securitizing U.S. $250 million royalty fees from the Malampaya natural gas project. But a market participant commented that it would have a great deal of difficulty in doing this. The National Home Mortgage Finance Corp is reported to be planning an RMBS deal, but the market participant said: "NHFC should have done a securitization of these assets years ago. It makes so much money for local banks it does not want to do anything else, and I do not think that it will do this deal." Market participants expect a few more transactions but do not think that the securitization market in the Philippines will become very large.
The recession is not believed to be having an adverse affect on securitization in the Philippines at present, however it is uncertain how exactly the events of Sept. 11 might eventually impact future deals. The Philippines department of finance is also planning to amend the law so that transfers of assets through an SPV would be exempt from tax. However the current legal set up is considered to be a major hurdle by market participants. If entities doing a deal ensure that the security is a qualifying dent security this problem can be avoided.
In August the Prisma Assets Berhad collateralized bond obligation closed. Another such transaction, CBO 1, is expected to close in October. Commerz International is expected to manage the deal. Hypovereinsbank is road showing its Malaysian Ringgitt 1 billion Moccis Trading deal. HVB will act as adviser and arranger, and Amanah Capital will act as underwriter and arranger.
Deteriorating economic conditions in Malaysia might cause greater volumes of non-performing loans, which are another potential asset class for securitization. Pengurusan Danaharta Nasional Berhad, Malaysia's national asset management company, is considering using securitization to dispose of bad loans. "At a recent conference in Kuala Lumpur, the chairman of Danaharta spoke of using this method," says Chong Kwee Siong at rating agency Malaysia Berhad. "Danaharta have about Malaysian Ringgitt 48 billion left on their books some of which might be disposed of by means of securitization. Danaharta was set up during the Asian crisis to deal with bad loans, but must also close down by 2005."
"Malaysia has the potential to do a number of deals," says Nick Hamilton at Hypoveriensbank. "Asset- backed securities are fairly well understood by local investors. There is a relatively sophisticated domestic insurance market that needs to diversify its investments, so there are buyers as well as sellers. Credit card companies in Malaysia have large portfolios and there are a significant amount of auto loans that could be securitized."
Hamilton also believes that, as the economic downturn progresses, Malaysian corporates and banks will consider securitization as a way of managing their balance sheets. But deals for the time being are likely to be domestic because of problems with foreign currency restrictions.
"Financial institutions have the greatest potential for securitizations," says Chong. "But at the moment, excess liquidity, resulting in cheap bank loans, is not favouring securitization. There is not much incentive for banks to empty their balance sheets as regards capital requirements. Rather banks are looking for assets because of excess liquidity. Among other things banks are seeking to get involved in consumer lending."
This could provide more potential for auto loan and credit card securitizations. "You get a good yield on these assets and could probably get around 10% yield on these," says Chong.
But at present there are limitations on what financial institutions can do. The Bafia banking Secrecy Act does not allow financial institutions to disclose customer information to a third party. "This would make it difficult to do securitizations of assets such as auto loans or collateralized loan obligations," explains Chong. "This would prevent parties such as rating agencies or back up servicers getting access to necessary information. And financial institutions also have to get approval before they can sell loans out of the bank."
But he adds: "Because of the excess liquidity banks have not needed to do securitizations. But players in the market are constantly in touch with the regulators."
Securitizations in the near future will be from government agencies and corporates. Chong does not believe that the drop in industrial output and manufacturing will affect the prospects for corporate securitizations. "If you look at aggregate data you get an average indicator of what an industry is doing," he says. "But there are also pockets of strength - there are good companies."
Chong estimates that, in the next twelve months, securitization issuance volumes in Malaysia could reach up to 1 billion Malaysian Ringgit. Many parties are reported to have shown an interest in doing securitizations in Malaysia, including foreign banks in Hong Kong and Australia.
"A financial guarantee company is being set up in Malaysia," says Chong. This could potentially facilitate more deals."