According to Wit Solberg, head of Fitch Ratings' Asian structured finance group, the imminent take-off of securitization in The People's Republic of China has the potential to make the business profitable for the region's ABS practitioners.
"I am very excited about China," Solberg said. "Securitization cannot be profitable unless you get scale. In other Asian markets you cannot aggregate scale due to regulatory issues. Therefore you need a market with a huge asset base whereby you get scale and yield, which China has.
"As far as motivation goes, the banks are highly liquid but their balance sheets need cleaning up, and securitization is a great way to resolve these issues," he added. "The desire to do securitization will be motivated less from the perspective of freeing up capital to pursue other loans, and more to sure up balance sheets."
Nevertheless, Solberg expects a gradual evolution of the market once the two pilot deals by China Construction Bank and China Development Bank (a deal Fitch is rating) are completed.
"From a structural standpoint, the [China Development] deal - a Lehman Brothers-arranged CLO backed by 62 corporate loans to 32 borrowers - is a good start. It legitimizes the true sale transfer of risk from one bank to a special purpose trust, which essentially is what a securitization is."
Even so, with the technical aspects of securitization still new to regulators and issuers alike, Solberg admits there is room for improvement. This will be reflected in the likelihood Fitch will assign a local rating to China Development's transaction.
"If I was being critical, there are some issues that could be clarified. For example, the legal opinions on how the deal works could be more explicit and the understanding of the underlying loans and data supporting the obligors could also be stronger," he added. "However, with it involving a policy bank in [China Development Bank], there is an implicit level of trust that what it is doing, is best practice."
India is another emerging securitization market Solberg has hopes for; with scale again a reason for optimism. To date, activity has been strictly limited to consumer finance deals. There are definite obstacles to India realizing its potential, although a lack of expertise among local arrangers is not one of those.
"India would be in the news more if it could do cross-border issuance, but presently, the low sovereign rating restricts this sector. In its favor though, the skill set to arrange deals among local banks is as strong as anywhere in Asia. Unfortunately the market has been concentrated on a limited asset class, which nobody is making much money on.
"Mortgages are tough to securitize because when you transfer assets into an SPV it triggers a 10% tax on value," added Solberg. "Additionally, the collateral quality has perhaps not been strong enough and the bank loan market is very competitive."
In other markets, Solberg sees potential for transactions linked to Hong Kong REITs investing in property in Mainland China (see ASR 10/24/05), some synthetic activity in Taiwan, and the possibility of occasional offerings from Indonesia and the Philippines. Fitch rated Indonesia's first ABS since 1997 when PT Bumi Resources completed a $600 million future flow of coal exports in June, arrainged by Merrill Lynch.
"There have been inquiries on future flow deals, similar to IndoCoal, where, although production takes place onshore the payment for goods goes directly into an offshore account," he explained. "This takes any legal enforceability issues offshore and has been a good source of financing for emerging market countries. They are not easy to do, but are potentially very profitable for investment banks and law firms."
Fitch recently appointed Rachel Hardee to take up the newly created post of head of Asia-Pacific structured credit, reflecting the region's growing interest in synthetic securitization, both as an arbitrage play and risk management tool.
"One feature that has been noticeable is the expansion of the single name CDS universe for Asian credits," observed Hardee. "When we speak to banks, there is a lot of interest in synthetic ABS. In China, for example, we expect banks will want to keep assets on balance sheet and, if so, synthetic technology may be preferred. Most of the CDOs in other Asian markets have been issued synthetically.
"Across Asia, Basel II should logically be a catalyst for a lot of SME-type deals and other balance sheet CLOs. We do expect to see more activity in this area, although how much will be directly related to Basel II will be hard to quantify."
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