As far as significance, innovation and price execution, 2005 stands out as an exceptional year for Asian securitizations.
With many exceptional deals, it was challenging selecting a winner for the Asian Deal of the Year. However, one transaction gained universal praise among the region's ABS professionals: the $600 million IndoCoal Exports future flow deal from two PT Bumi Resources subsidiaries, PT Kaltim Prima and PT Arutmin.
The transaction, completed in June and arranged by Merrill Lynch, came out of nowhere. Indonesia had not produced a single ABS deal since the Asian Crisis hit in 1997 and few predicted a comeback in 2005. They especially did not expect PT Bumi to inaugurate the sector's return, given that international condemnation of how the company came to own the two units had nearly choked off its access to offshore funding.
Merrill, however, realized the Kaltim Prima and Arutmin coal mines produced high quality assets and had numerous long-term contracts, more than sufficient to meet obligations on the seven-year deal. The challenge was satisfying investor concerns about risks associated with the borrower and Indonesia's laws.
As such, the deal was structured with a number of safeguards. The most important was convincing PT Bumi's clients to transfer payment for coal exports directly to collection accounts in New York. In addition, participants established daily monitoring of the cash coming into those accounts, with Bumi's rights to excess flows conditional on meeting strict covenants.
The structural enhancements persuaded Fitch Ratings to assign BBB-' ratings to the deal, piercing the sovereign ceiling and making it the first investment grade bond from Indonesia since 1997. Offshore investors were won over. As it was, 48% of the order book came from U.S. institutions, 35% from Asia and 17% from Europe.
Final pricing of 7.134% for a 3.1-year average life equaled 350 basis points over U.S. Treasurys, and cut KPC and Arutmin's cost of funding to 311 points over Libor from 400 basis points and 500 basis points, respectively. Favorable secondary trading has since lowered the spread over Treasurys to 270 basis points.
In terms of broader significance, the deal reopened Indonesian ABS after an eight-year absence, paving the way for other South East Asian borrowers to issue future flow transactions.
CCB finally completes MBS deal
Given how all involved on China's two pilot schemes helped persuade regulators to support securitization initiatives, it seems harsh to elevate one deal above the other. However, China Construction Bank, advised by Standard Chartered, is worthy of special merit for persistence alone.
CCB had, to no avail, submitted several proposals to regulators dating back to the late 1990's for an RMBS offering. Even when it got provisional approval in summer 2005 for a RMB3.1 billion deal ($383 million), there was still much to do, particularly in trying to avoid a double taxation clause that would have rendered the deal too costly.
The tax rule was dropped in late November, enabling CCB and CDB to simultaneously launch their deals on China's Interbank market. CCB, aided by local securities houses for the placement, priced its deal within a week of launch in December.
The senior RMB2.67 billion piece offered 110 points over the seven-day Repo rate (1.55%) on a 3.15-year average life. Although the borrower's name was the principal attraction to investors, orders from 51 institutions for China's first non-recourse loan securitization bodes well for future activity in the People's Republic.
Chinatrust offers solution to Taiwanese funds crisis
A deal for Taiwan's Chinatrust Commercial Bank also proved to be watershed transaction in 2005. At the end of 2004, huge losses in structured notes were slamming Taiwanese bond funds. Regulators ordered funds to get rid of these assets but, with only distressed prices available, fears arose that several fund providers could go under.
Foreign investment banks stepped into the breach, working alongside local banks that acquired structured portfolios. UBS took a pioneering role, structuring in September an NT$18 billion CBO for Chinatrust Commercial Bank. While not taking away losses completely, the deal helped funds monetize distressed assets at fairer prices than those available on the open market.
Essentially, the deal packaged 50% of the NT$-denominated bonds with 50% of triple-A rated US dollar-denominated zero-coupon bonds, combining them into a fixed security sold to local investors. The NT$9 billion senior notes, rated triple-A by Fitch, offered a pick-up of 20 basis points over the commercial paper index on a 3.1-year average life.
The transaction not only helped funds, but satisfied local investor appetite for quality foreign assets. It paved the way for copycat transactions, a trend likely to dominate Taiwanese activity in early 2006.
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