Followers of the Malaysian securitization market will have noticed the fierce level of competition among foreign firms bidding for the country's key ABS mandates. Those paying close attention may also have noticed the recurring presence on these transactions of a local investment bank, Commerce International Merchant Bankers.
Having arranged roughly M$2.13 billion ($560.5 million) worth of issuance to date, Commerce International is the biggest player on the Malaysian ABS scene with a 21% market share, according to Rating Agency Malaysia. With volumes expected to top M$5 billion this year - an 80% increase from last year - CIMB seems sure to be involved in a good chunk of the action.
Although Malaysia's market is comparatively small, activity is picking up for conventional and Islamic ABS. Commerce International is often the issuer's choice on high profile deals, such as last October's M$1.6 billion debut MBS offering by Cagamas, Malaysia's equivalent of Fannie Mae (see ASR 10/18/04). The bank is now working on Cagamas' next offering, a M$1.5 billion Islamic MBS, alongside HSBC Securities, and recently bid on an SME loans issue by the agency.
Additionally, Commerce International has this year structured a M$164 million auto loan ABS for Tan Chong & Sons Motor Company and a M$556 million Islamic ABS by Time Engineering, backed by revenues the company receives supplying computers to the Government.
After a six-year stint with UBS in London, Patrick Khoo returned to Malaysia in March to head Commerce International's securitization group. Given the increasing acceptance of ABS, Khoo has high hopes for what his team can achieve.
"It was a great opportunity for me to join Commerce International because it is the strongest investment bank in Malaysia," Khoo said. "We now have a designated structured finance group, which is part of the fixed-income and Treasury group so we are closer to the syndicate desk and traders. I have two people working with me right now but we are looking to build a bigger team because the pipeline for this product is healthy right now."
Even though Malaysia's domestic market opened in 2001, when the Security Commission introduced its securitization guidelines, activity was sluggish until Cagamas tapped the market last year. Following three lean years, Khoo says it is telling that it took a mortgage deal to get investors excited about securitization.
"It was important Cagamas came to market with an MBS deal that priced at between 20 to 30 basis points over Malaysian Government Securities and was four times oversubscribed," explained Khoo. "When the market opened, investors took time to understand different structures and also wanted a premium over straight debt. As a result, not many deals were issued. Another factor was that a lot of the early transactions were CLOs or CDOs, which were more complex and pretty risky. Perhaps it would have been better for the market to develop with more vanilla assets being securitized, such as mortgages, consumer loans and credit cards. This is how other markets developed, but because Malaysia went down a different route, securitization was tainted for a while."
Khoo acknowledges there are currently cheaper funding methods available than securitization. Nonetheless, he says issuers are encouraged to launch ABS deals for other reasons.
"Most banks are flush with liquidity so securitization is not motivated by a need for funds," says Khoo. "But from a risk management perspective, they can transfer risks to capital markets investors and still retain some stake in the assets by holding the equity or first loss tranche. At the moment though, for some asset classes this is still quite expensive and they prefer to keep the assets on balance sheet for the time being."
With Malaysia being an Islamic state, the past year has seen real expansion in the Islamic securitization sector. According to Khoo, there are significant benefits of issuing Islamic deals. "Choosing this route broadens the spectrum of investors available to issuers, as conventional as well as Islamic institutions can buy these products," Khoo adds. "Hopefully, they can get pricing advantages over regular ABS from increased demand, which is probably the situation right now. There are also benefits for some investors in holding sukuk-compliant instruments - such as tax exemptions - so this is actually encouraging Islamic bond issuance in this country."
With a strong pipeline of deals in Malaysia, Khoo and his team have enough work to keep occupied. Even so, Commerce International is also looking at opportunities elsewhere. "We have a local presence in Indonesia, Singapore and will also look at Thailand, Vietnam and the Philippines because we can really compete in these countries," noted Khoo. "Indonesia is potentially a big market for ABS. I would imagine sometime in the next year we would begin conducting market studies there. There are a few issues with the underlying legal framework, but precedents have been set in other Asian markets, so I see no reason why deals can't be done there or the Philippines for that matter."
"As for corporates, securitization is a non-recourse form of financing and companies transfer the risks associated with the securitized assets," summed Khoo.
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