After a quiet 2003, things seem to be heating up for the Hong Kong securitization market, and some expect a few new deals to emerge before the end of the year.

What had people talking last week, though, was the confirmation from the Hong Kong government that it indeed will move ahead with securitization as a means for increasing revenues and addressing the budget deficit.

On Wednesday, the government appointed HSBC Securities as financial advisor to help with structuring on the securitization of toll revenues from government-owned tunnels and a bridge. It's unclear whether HSBC will conduct the associated bond issues, as a mandate announcement will come from the government at a later date, according to reports.

The tunnel and bridge assets were talked about last summer as having potential for securitization, so it is not surprising these have emerged at the forefront of the Hong Kong government's securitization strategy.

According to Diane Lam, a managing director at Standards & Poor's, at this stage the government is looking into privatizing a number of different assets. Aside from the toll-road tunnels, where an advisor for the deal has already been selected, there is talk of the government exiting real estate property. The government is expected to consider securitizing or privatizing its interests in commercial property and car parks.

If the government chooses to privatize its assets, securitization could also be a candidate for the acquiring entity. For example, in Europe operating business securitizations have been used as a form of acquisition financing.

"Potentially, we could see the emergence of operating company cash flow securitizations, because Hong Kong law is based on English common law, so it should be possible to structure these types of deals," says Lam.

At this stage, it is difficult to guess which particular assets will be selected by the government. "However, the government initiatives for 2004 could turn out to be a real impetus for kick-starting securitization in Hong Kong," Lam added.

According to reports, Hong Kong intends to privatize or securitize HK$112 billion (US$14.42 billion) of assets over the next five years.

HKMC platform to expand

You don't need to wait years to see the market blossoming, however. Last week, two transactions closed, in what had until now been an uneventful Hong Kong market.

By all accounts, HSBC is emerging as a strong player. As reported last week, HSBC Securities brought the Lion Synthetic Limited 1 deal, a synthetic CLO - referencing a portfolio of tax and public light bus hire purchase loans - originated and led by HSBC.

Shortly thereafter, Hong Kong saw its largest mortgage securitization to date: Hong Kong Mortgage Corp.'s (HKMC) second deal out of Bauhinia MBS Ltd. Market participants say that this deal bodes well for more securitization prospects from this issuance platform.

HKMC is looking to acquire other portfolios, which should then be securitized, sources said.

Another positive for securitizations: The property market in Hong Kong is looking in increasingly better shape. "Property prices look healthier and are cautiously trending upward. Transactions are also growing, and there is more activity in the mortgage market," S&P's Lam said.

HKMC has reported publicly that it is looking at other potential assets, which could include government civil servant mortgage loans as well as additional collateral from commercial banks, where there

has been a renewed growth in


Lam adds that one of the aims for the HKMC is to increase its portfolio size and then to issue RMBS ultimately on a non-recourse basis. (The recent deal was in fact guaranteed by HKMC.) This model provides HKMC with optimal use of capital, risk transfer, and very advantageous funding at the triple-A level, for non-guaranteed and well structured, domestic RMBS.

The Bauhinia issuing vehicle was set up as a multi-purpose program, which means that HKMC has the flexibility to issue recourse and non-recourse financing. HKMC also has the capability to issue offshore, though the corporation seems intent in developing a strong base of domestic investors for non-guaranteed residential mortgage-backed securities. HKMC is said to have a funding program of between HK$10 billion and HK$15 billion (US$1.3 billion toUS$1.9 billion) over the next year, and market participants are expecting more activity.

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