Chinatrust Commercial Bank, the largest private lender in Taiwan, completed on Tuesday the country's first public RMBS with a NT$5 billion (US$147 million) offering. Lehman Brothers acted as arranger and co-lead managing underwriter, with Fubon Securities, Grand Cathay Securities and Yuanta Core Pacific Securities making up the local syndicate.

The transaction is backed by 2,723 first lien mortgage loans with an average outstanding balance of NT$1.8 million (US$53,000). The weighted average loan-to-value is 73%.

Regulators at the Bureau of Monetary Affairs OK'd the deal in October 2003. Since then, First Commercial Bank completed Taiwan's first MBS in March with a NT$4.28 billion (US$126 million) issue via Deutsche Bank, followed a month later by Taishin International Bank with a NT$4.4 billion (US$129 million) transaction put together by Citibank.

Both of those deals were placed privately. The essential difference between private and public is that bond funds can buy into the latter.

The delay in Chinatrust came because the parties involved sought to go public, according to Patrick Kaye, senior vice president of Lehman's global structured finance group.

"The Chinatrust deal was actually the first to get approval but we felt that the private placement route would not give Chinatrust the execution it wanted, so we regrouped and reoffered the deal publicly," Kaye said. "As a result, substantial cost benefits were achieved, through lower pricing and subordination."

The decision to tap the public market looks to have paid dividends in terms of cost. Both triple-A tranches on FCB and Taishin deal offered 25 basis points over the six-month adjustable mortgage rate. Most mortgages are priced against this, and the current rate is around 1.4%.

Meanwhile, the NT$4.33 billion (US$127 million) of triple-A notes on the Chinatrust deal offer the same 25-point margin, but are marked against the three-month commercial paper index, which is currently around 1.026%. The legal final maturity of the bonds is 22 years with expected average lives of 3.2 years. Taiwan Ratings rated the paper.

In addition, the transaction offered NT$250 million (US$7.3 million) of 9.2-year double-A paper at 55 points and NT$150 million (US$4.4 million) of 11.4-year single-A notes at 80 points, while the NT$130 million (US$3.8 million) 13.1-year triple-B tranche closed at 125 basis points. The issuer will retain an unrated NT$176 million (US$5.2 million) tranche as credit enhancement. That is equivalent to only 3.5% of total capital, which Kaye said highlights the efficiency of the structure.

The margins on the subordinated tranches were wider than equivalent rated pieces in the previous two MBS deals, but when the lower rate of commercial paper is factored in, the cost difference is negligible.

At press time, details on investor allocation were unavailable. However, Kaye was confident that demand was strong.

"The addition of Fubon, Grand Cathay and Yuanta to the underwriting effort had the effect of broadening the distribution effort and giving Chinatrust access to a larger pool of investors," says Kaye. "We believe it was a great team effort between us, the local underwriters and the issuer, who took an intelligent, deliberate approach to the process."

Kaye argues that Chinatrust has set a new standard for Taiwan securitization by avoiding beginner structures' employed on many new Asian transactions. "This has the full spectrum of investment-grade tranches and allowed Chinatrust to match its funding needs without third-party involvement," he says. "It is a pure non-recourse pass-through structure, and the ratings were secured purely on asset quality, subordination, excess spread and the issuer's retention of the small unrated tranche."

He added that the long tenor bodes well for change in a market traditionally focused on the near term.

Elsewhere in Asia, Korea Housing Finance Corporation, the state mortgage company established in March by the Government and Bank of Korea, has completed the second deal from its recently established monthly MBS program (see ASR 6/28, p.18).

Daewoo Securities, Sejong Securities and Hanyang Securities jointly led KHFC's latest W407 billion (US$352.4 million) offering. The transaction, issued out of the MBS 2004 vehicle, was backed by loans originated by Kookmin Bank, Kiupbank, Nonghyup, Woori Bank and Korea Life Insurance.

The deal was split into six tranches, rated triple-A by Korea Ratings and Korea Investors Service, with maturities ranging from three years to 20 years. KHFC's previous issue was split into nine tranches. Call options were attached to tranches beyond five years.

As with its first deal, KHFC was again able to achieve tight pricing with a weighted average coupon of 5%, 57 basis points over Korean treasury bonds. Individual coupons ranged from 4.28% on the three-year piece to 5.20% on the 20-year notes.

Despite criticism in some quarters that more yield could have been given to attract buyers, KHFC has been lauded for actively trying to sell itself and the MBS product. The agency recently held a series of seminars at top hotels in Seoul, inviting securitization professionals to make presentations on how deal structures work and inviting investor feedback on what they seek in future offerings.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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