Not long ago, asset-backed securitization was expected to play a major role in Asia's recovery by helping domestic issuers tap overseas funding for recapitalization and restructuring. But outside Japan, Australia and Hong Kong, highly liquid domestic markets, a dwindling number of potential issuers, and foreign investors still wary of Asian risk have dimmed the prospects for global ABS issuance from the region.
Still, market players throughout Asia are eager to use securitization, and have applied many of the same techniques used in securitization to structure transactions. The result has been a rise in quasi-ABS deals in South Korea and Singapore, in particular usually involving a well-known domestic originator, local currency-denominated assets, and placement into the domestic market.
Though often called securitizations by the arrangers and the local media, they do not meet the standards of international asset-backed deals. Rather, these transactions represent an in-between stage between ordinary debt financing and true securitization.
"Singapore and Korea are developing securitization domestically, in a way that fits their legal, tax, and investor requirements so that they can get execution without doing a full-blown international- standard securitization," commented Christopher Chau, director of international structured finance at Fitch IBCA in Hong Kong. "The recent CMBS issues from Singapore are really structured notes, but that doesn't matter because it somehow gets them balance sheet management that they want at the cost of funding that they want. What we're seeing now in both places is the first step in the development of the market."
Singapore: Issuing Structured Notes, not CMBS
Starting last December, Singaporean property developer DBS Land has issued in quick succession three transactions backed by commercial property, in what it says are the first asset-backed deals from Singapore. Each transaction has a similar structure: DBS Land sold one of its buildings to a special purpose vehicle, which issued junior and senior bonds to fund the purchase and had the option to put the building back to DBS Land at the end of maturity. All of the transactions were Singapore dollar-denominated, unrated, and placed in the domestic market.
But despite the branding effort, these transactions are not true securitizations, sources said. "The put-back option means that the SPV can sell the building back to DBS Land after ten years at a pre-guaranteed price. In other parts of the world, that wouldn't be considered a true sale for accounting purposes," pointed out one banker in Singapore.
Guaranteeing principal and other payments to investors ties the credit risk in the transaction back to the seller, meaning that none of the deals could have achieved a rating higher than DBS Land, pointed out an analyst in Hong Kong. "In real CMBS deals you stress the cashflows, pay attention to the debt service coverage ratio, and quantify the loan-to-value. Probably not much detailed analysis was done on the cashflows here, because this is a highly regarded local player."
Bankruptcy remoteness a key element in securitization has been questioned in another property-backed transaction. That transaction was originated by Pidemco Land, which said it raised S$100 million ($59 million) through Singapore's first securitization backed by the sale proceeds of apartments.
In most securitizations, the special purpose corporation that issues the securities is owned by a third party or charitable trust, to ensure that the securitized assets are not included in the bankruptcy estate of the seller. Since Pidemco's securities were issued by a wholly-owned SPC, it raises the issue of whether the transaction is bankruptcy remote, agreed sources. "It is possible to have a wholly-owned SPC if you get a non-consolidation opinion from a lawyer. But in Pidemco's case, the fact that the SPC is wholly-owned is another reason why this wouldn't be considered a true CMBS," commented one analyst.
Pidemco may not have felt the need to set up a bankruptcy remote SPC because it is owned by the Singaporean government, pointed out another banker. Still, "one of the tenets of securitization is bankruptcy remoteness, and at the end of the day the bankruptcy remoteness of this is questionable," he added.
Despite the missing pieces, Singapore still has great potential for issuing ABS globally. "The transactions from Singapore are structured in a way that tries to reduce some of the risk by giving collateral, but have not reached the level of a pure CMBS such as what has been done in Japan and Hong Kong," commented Diane Lam, director of structured finance ratings at Standard & Poor's in Hong Kong. "The assets and legal framework are there, and the concept is well-known, but issuers don't need much money at the moment."
South Korea: Looks Like Corporate Bonds
Unlike Singapore, South Korea has already issued global securitizations. Those transactions, originated by the Export-Import Bank of Korea and Industrial Bank of Korea, were backed by U.S. dollar-denominated assets and met the standards of international investors.
Since then, domestic arrangers have quickly seized upon a recently passed ABS law and applied securitization techniques to fit the domestic market. The result has been a wave of structured deals which are securitizations in name only, but still a step in the right direction. "Korea has really embraced securitization as a tool. Even though you see all these weird deals coming out of there, at least people really like the concept and are testing it out," remarked one analyst in Hong Kong.
One unique feature of domestic asset-backed issuance in Korea is that until recently, all transactions have recourse to the seller. That was until Daewoo Financial Services Corp. issued a pioneering auto loan-backed deal in June. "Before Daewoo, all of the asset-backed deals done in Korea were structured with recourse to the seller," said Paul Burke, head of securitization in Asia for Chase Securities, which served as Daewoo's structuring adviser. "Since the seller was downgraded to non-investment grade, it was important for us to get a true ABS structure so that the deal would perform regardless of what happened."
That transaction was also noteworthy for having a third-party trustee and backup servicer two other features not usually found in Korean ABS deals, as Korea's ABS law passed last September does not require a trustee. But since March the Financial Supervisory Service, the country's financial regulator, has insisted on a trustee for all ABS transactions, noted Kyu-Jin Kim, a structured finance banker at Daewoo Securities in Seoul.
Another peculiarity about Korea's ABS market is that it is very investor-driven, making it possible to execute deals in a relatively brief period. For example, the Korea Asset Management Corporation (Kamco) took only a few weeks to arrange its first two non-performing loan-backed securitizations.
This is because Korean investors viewed Kamco's ABS as a collection of corporate credits of the commercial banks whose assets backed the issues. "Until Daewoo, the kind of analysis that went into Korean asset-backed deals did not involve detailed historical analysis of portfolio performance. In earlier deals, investors took comfort from recourse to the corporate credit of the seller," Burke explained. Criteria of domestic ratings agencies are also far less strict than those of international agencies, added another analyst.
Finally, investors are not so concerned about analyzing cashflows for a good reason. "Originators do not keep their statistics well in Korea, and if they do, they are not reliable after the IMF bailout in 1997. Even though we do analyze asset performance statistics, the most important factor is the liquidity facility," noted Kim.