A decade after the financial crisis that decimated the economies of East Asia, securitization has gained a good deal of momentum in the region, particularly in the domestic markets of several Asian countries.
Experts are keeping a keen eye on China, the Asian country that offers the greatest potential for securitization in the coming years.
"In 2005, China allowed two pilot transactions, an MBS deal for China Construction Bank and a CBO for China Development Bank," said Warren Lee, managing director and head of securitization at Standard Chartered Bank in Hong Kong. "There are five other deals awaiting approval under the second pilot ... and we hope to complete five deals by yearend."
China also issued its first cross-border CMBS deal, called Dynasty, last year. More work is being done to facilitate future CMBS deals, in light of the amount of construction work going on in China. In Korea, RMBS and consumer ABS deals have gained ground, while Singapore has done many SME CDOs and U.S.-style structured finance CDOs.
Looking ahead, there is great potential for securitization in both China and India because of the fast-paced growth that both countries are experiencing. However, cross-border securitization from both countries - and indeed, for Asia as a whole - is not likely to pick up as much as people would like for a number of reasons, not least because of ample liquidity in their domestic markets.
"The fact that Asia is currently awash in liquidity makes it relatively easy for borrowers to raise funds at competitive pricing or through domestic securitization markets without structuring complex cross-border transactions," said Marjan Weijden, senior director for structured finance business development at Fitch Ratings in Singapore.
"As there is surplus liquidity in the market since 2002, from an all-in cost standpoint, securitization is not that attractive, especially given the complexity of putting together a transaction," Standard Chartered's Lee said. He added that Asian issuers still suffer from psychological barriers: They don't believe in selling off their best assets. Or, in some cases, they still believe bigger is better.
The low credit ratings of several Asian nations also continues to make it difficult for issuers in these countries to put together securitized transactions, as the deals' ratings remain constrained by the sovereign ceiling, Weijden said. "For issuers in countries rated below investment grade, cross-border deals can work for companies or issuers that have payment streams coming from overseas," she said, adding that they have seen this type of transaction more regularly in Central Asia and Latin America. "These deals could be replicated in Asia in the form of future flow transactions and workers' remittances."
There have been a couple of deals of this nature in past years, notably for Indonesia's IndoCoal Exports, which in 2005 issued a future-flow deal backed by receivables from the country's leading coal producers. However, the number of Asian issuers that can avail themselves of payment streams from abroad is still limited, so the scope for these kinds of deals is not large.
But despite the fact that most Asian issuers can easily fund through straight bank loans or domestic securitizations, experts believe it would be in the best interests of countries to encourage the development of a cross-border securitization market.
"Even in this kind of environment, having the option to securitize is always good, since it allows borrowers to diversify their funding sources and secure long-term funding," Weijden said.
At the macro level, securitization can also play a strong role in facilitating regional economic development, said Lotte Schou-Zibell, an economist in the Office of Regional Economic Integration at the Asian Development Bank (ADB). Beyond serving as a means to deal with loan losses, securitization can also go a long way in helping to fund Asia's massive infrastructure needs, provide support to microfinance initiatives and give credit support in such areas as long-term student loans and human resource development, she said.
The ADB has taken several steps to support the development of securitization in Asia and the Pacific, including legal and technical assistance in asset-backed securitization in China, the securitization of diversified payment rights in Kazakhstan and the $10 billion Asian Currency Note Program, which is the first regional platform dedicated to bond issues in regional currencies under a single unified framework with a common set of documents governed by English law.
The possibility of multilateral institutions playing an intermediary role in specific areas - such as strengthening the judicial processes in various countries, establishing common best practices in documentation and risk appraisal among financial intermediaries in tandem with regulatory improvements, and encouraging the use of securitization in areas of public policy - represents "an original and nonconflicting use of official capital with clearly identified value in terms of poverty reduction and incentives for resource development," Schou-Zibell said. "These are practical schemes that are otherwise unlikely to find commercial support unless incentives are developed to persuade banks to become involved."
Above all, though, bankers and other parties would like to see a general change in the regulatory framework of Asian nations, which would then make securitization easier, more attractive and more feasible. In many countries, legislation is either unclear or still under development, which makes it harder and more costly to structure deals.
"Having a clear legal and regulatory framework is the key ingredient for the development of the market," Lee said. "At minimum, there must be tax neutrality."
Standard Chartered has done many deals in Asia, including an RMBS transaction for China Construction Bank in 2005; a $1.2 billion RMBS deal for Korea-based SC First Bank, the largest and first unwrapped multi-tranched RMBS ever completed in Asia in 2006. That same year, the bank did Polaris, Taiwan's first synthetic CBO using the Itraxx index.
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