Hong Kong's Pan Asian Mortgage Company recently launched what is believed to be the world's first securitization of negative equity residential mortgages. South Africa's Standard Bank is arranging the HK$260 million issue ($33.5 million), its first securitization mandate in Asia. The deal has been something of a hot potato, with HypoVereinsbank and Lehman Brothers linked to it in the past two years. Despite the small size, the transaction will be likely deemed a coup for the lead.
"We are delighted to be involved in a transaction of this nature, which allows us to meet the unique needs of this sector in Hong Kong," an official at the bank said. "We are in the final stages of completing the structure, with closing and pricing expected to be concluded before the end of November."
Inspired by tanking property prices in Hong Kong after Asia's 1997 crisis, ex-Bear Stearns and Goldman Sachs banker Leland Sun set up Pan Asian in 2002. With roughly 20% of borrowers holding negative equity in their homes back then, the new shop, along with banks like Asia Commercial Bank and Citic Ka Wah, created the Superfirst Mortgage scheme.
This allowed mortgage borrowers with loan-to-values of up to 140% to refinance at lower rates of interest than they were paying originally. Under the scheme, the banks take up to 90% of the LTV risk with Pan-Asia accountable for anything above that, and it is the Pan Asian risk that is being securitized.
Although the situation has improved - according to the Hong Kong Monetary Authority, the share of homeowners holding negative equity is now near 5% - Pan Asian felt it was timely to tap the market. Collateral consists of 747 loans with a nominal value of HK$1.2 billion, a weighted average LTV of 115.33% and average seasoning of 6.7 years. Despite the economic turmoil engulfing Hong Kong for much of the past five years, only five loans have defaulted since the program started, with no payments overdue on the mortgages behind this deal.
Launched out of Cayman-Island SPV Superfirst Mortgage Assets Receivables Trust, the deal features three tranches. Moody's Investor's Service and Standard & Poor's have respectively rated the HK$223 million senior notes Aa2' and AA-' and the HK$37 million junior tranche Baa2' and BBB'. Pan Asian will hold an unrated HK$17 million first loss piece. Indicative pricing for the senior notes, with expected average lives of 1.5-2.2 years, is in a range of Hong Kong Prime minus 280 to 260 basis points, or 2.325% and 2.525%. The pick up for the junior tranche, with average lives of 5.2-7.6 years, will be between 150 to 125 basis points under Hong Kong Prime , or 3.675% and 3.875%.
There is not really a comparable deal out there on the market, although the recent HK$2 billion offering by Hong Kong Mortgage Corp. (see ASR 10/25/04) included a HK$650 million 4.8-year floating rate piece offering 18 basis points over Hibor. With Hibor set at 0.13676% as of Thursday, the Pan Asian offering will attract investors looking for yield. Bankers involved say the transaction is attracting interest from a broad spectrum of institutional buyers, including banks and fund managers.
Meanwhile, a Fitch Ratings conference last week in Singapore confirmed what ABS players in Asia have known for some time: business is growing across the region, with Singapore as the hotspot. At the powwow, Ben McCarthy, Fitch's head of non-Japan Asia structured finance, told delegates Singaporean volumes were up 350% in 2004.
Property developers such as Ascendas Real Estate, CapitaLand and Jurong Point Realty dominate the landscape; with CMBS the major asset class through real estate investment trusts (REIT). "The growth in Singapore's securitization market has come largely on the back of strong growth in the REIT market," says McCarthy. "With the expectation of further listing of REITS and the current asset acquisition program that will to a degree be financed by debt, Fitch expects the issuance of CMBS from Singapore to increase further in 2005." McCarthy also sees potential in the Lion City for government transactions, along the lines of the tunnels receivables deal completed by Hong Kong in May.
Meanwhile, the recent slump in Japan is holding. Only one publicly known deal was issued in the last week, the fourth auto loans-backed offering from Mitsubishi Auto Credit Lease Corp. through its MCL Auto Credit Trust vehicle. MCL, a unit of Mitsubishi Motors Group with assets of Y345.7 billion ($3.3 billion), issued Y17.3 billion of seven-year fixed rate trust notes. This comprises a Y15.7 billion senior tranche - rated triple-A by Moody's - and Y1.6 billion of unrated subordinated notes, which will be the main credit enhancement for the deal along with excess spread and a cash reserve.
Elsewhere, just a month after closing its debut net-interest margin securitization (ASR, 10/4/2004), Australian mortgage provider Interstar Securities is preparing another first: its debut MBS backed by loans originated from its New Zealand portfolio. The NZ$125 million (US$88.6 million) offering - arranged by Westpac Banking Corp. and to be issued through the NZ Millennium Series 2004-1 Trust - securitizes a pool of 652 first-registered loans, with a 72.3% weighted average LTV and 16.3-month average seasoning. All borrowers have mortgage insurance and 12 months timely payment coverage has also been structured in.
The deal is split into three tranches, all with a 30-year legal final. S&P rated the senior tranches - NZ$50 million of floating and NZ$70 million of fixed-rate paper - AAA' and the NZ$5 million junior piece AA-'.
A population of four million curbs opportunities for securitization in New Zealand, but property is one asset class that generates enough cash flow to make the occasional MBS viable. Interstar - acquired last year by Challenger Financial - joins Australia Mortgage Securities and Medical Mortgages Ltd as issuers of prime-MBS from New Zealand, while non-conforming specialists Bluestone Mortgages issued in June the country's first sub-prime MBS with a NZ$98.5 million deal.
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