While some ABS bankers enjoyed Christmas party season, the week leading up to the holidays was not so relaxing for those working on deals in China, Korea and Taiwan. The extra hours proved profitable, with four transactions completed, all establishing some sort of benchmark.
Most focus centered on the two government-supported pilot securitization programs in China: China Construction Bank's (CCB) RMB3 billion ($371.6 million) MBS offering and China Development Bank's (CDB) RMB4.2 billion infrastructure loans CLO.
CCB and CDB claimed arranger status on the deals, although Standard Chartered, credited as financial adviser to CCB, and Lehman Brothers, employed in a similar but unofficial capacity by CDB, were heavily involved in the structuring. Local securities firms handled placement, conducted on the Interbank market.
With huge investor interest, both transactions priced within a few days of launch. CCB's issue, launched from the Jian Yuan 2005-1 special purpose trust, was backed by over 15,000 loans.
The triple-A rated RMB2.67 billion senior notes, with 3.15-year average lives, priced at 110 basis points over the Seven Day Repo Rate, 1.5561% at launch. The A-rated RMB204 million B-tranche offered a 170 basis point spread for an average life of 9.24 years, while the BBB-rated RMB53 million C-class certificates were issued at 170 basis points for 9.3 years. Bankers involved say the weighted average coupon was 1.17% over the Repo Rate for a weighted average life of 3.68 years.
Bankers acknowledged investors were attracted chiefly by the name of the borrower - CCB, like CDB, is one of China's Big Four state-run banks - rather than by any sudden appreciation for securitization structures. Even so, orders came in from 51 institutions, including banks, brokerages, insurance companies and the National Social Security Fund.
Given that CCB's housing loan book is worth RMB350 billion, this deal represents only a fraction of its portfolio. However, sources say while CCB may be reluctant to securitize more prize mortgage assets in the short term, it is considering a deal backed by non-performing loans.
Warren Lee, StanChart's head of Asian securitization, was proud of his bank's role in the transaction, and hopeful of a surge of activity from the People's Republic. "Through the CCB transaction, Standard Chartered has introduced international ABS market practices and standards to China," says Lee. "We expect increasing interest in asset-backed securities from Mainland China as banks and other companies are actively looking for options to further improve capital adequacy ratios, better manage assets and liabilities as well as explore alternative funding sources."
CDB, meanwhile, garnered bids from 71 institutional investors for its transaction. Issued from the CDB 2005-1 CLO SPT, the deal was collateralized by 51 loans to 29 corporate borrowers.
The RMB2.924 billion senior certificates, rated AAA, were offered at 2.29% for a 0.67-year average life, with the RMB1 billion junior piece pricing at 45 points over the one year deposit rate (2.25%) for 1.15 years.
Given the first-time nature of the deal, pricing - as anticipated - was towards the wider end of the indicative range, offering a healthy pick-up for investors over one-year bank-issued commercial paper, trading a smidge under 2.00%. Reports suggest CDB is planning a follow-up RMB5.8 billion deal early in 2006, and a further RMB10 billion later on in the year.
Although regulators are likely to observe how both pilot deals perform before introducing any comprehensive ABS legislation, the banking watchdog - the China Securities Regulatory Commission - expects issuance to top RMB200 billion ($24 billion) within two years. Already, others are looking to follow the lead of CCB, CDB and China United Telecommunications, which completed a RMB3.2 billion short-term ABS in September (ASR, 9/12/05).
China Orient Asset Management Company, one of the four state-run AMC's established in 1999 to clear up distressed assets in the financial system, announced plans to issue a RMB8 billion non-performing loans deal. Senior officials say securitization will form an important part of its resolution program in 2006.
The NPL situation, while much improved from 1999, has assumed critical status this year with Chinese authorities desperate for banks to improve balance sheets ahead of China's accession to the World Trade Organization at the start of 2007. One condition for its entry to WTO is the opening up of the banking system to foreign competition.
Using securitization in NPL resolution is not new in China. Huarong AMC securitized a portfolio with a face value of RMB13.25 billion in June 2003, while the Industrial and Commercial Bank of China completed a RMB2.6 billion transaction in May 2004 (ASR, 5/24/04).
Meanwhile, toll operator Dongguan Development Holdings last week listed RMB580 million ($71 million) of 18-month ABS paper on the Shenzhen Stock Exchange. GF Securities is managing the transaction, issued through the Dongguan-Shenzhen Highway Profit Management SPT, which offers investors returns running from 3% to 3.5%.
While those spreads are markedly higher than those achieved by Unicom and the pilot schemes, they still look attractive to the borrower when compared to one-year bank loan rates of around 5%. The deal is backed by income earned by tolls on the expressway linking the industrial cities of Dongguan and Shenzhen in Southern China's Guangdong Province.
Elsewhere, Taiwan's Hsinchu International Bank completed its 255 million ($307.6 million) RMBS as 2005 came to a close. Calyon Securities arranged the transaction and provided the swap on what was the country's first cross border mortgage-backed issue.
Launched through the Hsinchu International Mortgage 1 SPV, the 3.5-year notes were rated triple-A by Moody's Investors Service and Standard & Poor's due to an unconditional guarantee from Ambac. The notes priced at the wide end of the indicative range, offering a spread of 17 basis points over Euribor. Bankers say the deal was oversubscribed, with bonds placing with a broad range of investors throughout Asia and Europe.
Meanwhile, Korean consumer finance company Hyundai Capital completed a 330 million auto loans deal, with ING sole lead manager and swap provider. The three-year transaction priced at 15 basis points over Euribor, establishing a new benchmark for unwrapped Korean deals.
The notes secured triple-A ratings from Moody's and S&P, following the path laid by Samsung Card. Samsung in November became the first Korean borrower to secure top ratings for an unwrapped transaction. Standard Chartered arranged the $300 million auto loans issue, which priced at 17 basis points over Libor.
The decision of rating agencies to award triple-A ratings on a standalone basis has sparked debate among the region's ABS bankers. All agree the absence of monoline fees improves the cost competitiveness of cross-border transactions. That is good news for borrowers, while any resultant increase in activity will boost bank's fee income.
However, some bankers reckon it does not fully take into account legal risks and the North Korean situation. Both Hyundai and Samsung were able to achieve tight pricing by doing conduit transactions. It remains to be seen whether international investors would want some extra spread if a Korean issuer were to launch a large public deal.
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