SINGAPORE - Attendees at last week's Securitization World Asia 2005 event, hosted by Terrapinn at the Grand Hyatt Hotel, were in the mood to celebrate following a successful year for the region's ABS scene. The outlook is bright as well, with Korean cross-border issuance again at the forefront, domestic markets in Malaysia and Taiwan blossoming, and the long-awaited entry of China into the business.
"The market has come a long way since the early 1990s," observed market veteran Leland Sun, who, following stints at Goldman Sachs, Bear Sterns and the Hong Kong Mortgage Corp., is now CEO at the Pan-Asian Mortgage Co. "The investor scene was dominated then by commercial banks and a few private banking clients, but has now broadened to include insurance companies, hedge funds, pension funds and central banks, which is hugely positive."
Players see need for standardization
While acknowledging the region's progress, Sun stressed that significant strides still need be taken for Asian markets to compare to those in the U.S., Europe, Japan and Australia.
"There is a need in the market for more repeat issuers and homogenized assets," Sun said. "We have seen innovative deals involving taxi loans and negative equity mortgages, but are they really ripe to repeat? One-off issuers/deals lead to less secondary trading."
Sun added that the market needs to streamline the process involved in putting deals together as some standardization would be helpful to dealmakers, noting that securitization costs tend to be high relative to alternatives. "Costs have declined as the market has evolved, but there are still too many parties involved," Sun said.
Another seasoned Asian practitioner, Linklaters Partner Paul Kruger agreed that the path from mandate to execution could be eased. "Outside Korea and Japan, there is not the consistency or depth in domestic markets, and the real challenge must be to create a legal and commercial environment where ABS is seen as a core funding strategy by local companies," Kruger said. "I would also like to see the process of bringing deals to market simplified. Taiwanese mandates, for example, are easy to come by, but actually completing a transaction can take a long time. Compare this to Korea, where once mandates are awarded, deals get executed quickly."
Securitization in certain countries, Hong Kong being a prime example, has been hindered by cheap funding alternatives, particularly syndicated loans. This was a major theme at the conference. Yet while some delegates scratched their heads at how to make
securitization more competitive, Boudewijn Berger, vice president of Asian securitization at ABN Amro, offered an uncomplicated answer.
"The environment is similar to where Europe was in the mid-90s, which now has a huge ABS market. Hopefully Asia will follow a similar trend," Berger said. "It should be stressed that while bank liquidity is high, that does not mean you cannot get tight pricing for ABS issues. This is especially the case when an issuer does repeat deals. Korea First Bank, for example, got 13 basis points over Euribor for its last deal. O.K., it was wrapped, but those spreads are still very tight."
Some are iffy on Korea triple-A
Korea is often held up as the model for other Asian markets to replicate, with a deep domestic market and thriving cross-border activity. As proof of the country's progress, Berger cited Samsung Card's unwrapped credit card deal via Standard Chartered, which priced at 17 basis points thanks to a Aaa' rating by Moody's Investors Service. However not everyone is convinced the credit assessment was completely justified.
Anthony Cutcliffe, UBS' head of Asian securitization, has been involved in several cross-border transactions from Korea. While recognizing issuers will relish being able to secure triple-A ratings on unwrapped deals - good news for arrangers - he feels investors should fully appreciate the risks in buying Korean paper.
"An unwrapped Korean MBS deal could conceivably price in the low-mid-20s spread range, which would make this very competitive to issuers," said Cutcliffe. "That said, there are still a number of risks and to say any structure can be regarded triple-A is dubious. War risk, however slight, seems to have been disregarded, while the legal risks can hardly be deemed zero either."
On the bright side, Pan Asian's Sun argued that while Korea, Japan and, at some point in the future, China, will drive ABS growth in the region, even countries currently lagging could shine with a firm prod from supranational institutions.
"One development that would benefit Asian ABS would be supranational sponsorship of local currency programs," argued Sun. "The Asian Development Bank and International Finance Corp., for example, are focused regionally on promoting housing finance for economic stability. Therefore they can play a leadership role through securitization to kick start markets such as the Philippines, Thailand and Indonesia."
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