HSBC has been involved in a groundbreaking deal - the first ABS synthetic transaction originated in Hong Kong that securitizes a portfolio of taxi and public light-bus hire purchase loans. The loans were also originated by HSBC.
There have been just a few other synthetic transactions in Hong Kong in the past. A source at the bank said that this was the first time HSBC had securitized in Asia, and that HSBC had opted for a synthetic structure because it was less complicated to execute than a cash securitizations. Also, as a highly liquid bank, HSBC was not in need of additional funding.
HSBC transferred the credit risks of certain eligible hire purchase loans to the issuer with a total securitized reference portfolio amounting to HK$3 billion (US$386.6 million). This will also improve HSBC's capital efficiency and return on capital, which will allow HSBC to expand lending in this sector.
Hong Kong has been in what might be described as a securitization lull, although there could be a few more deals before the end of the year. "There are other banks that could be interested in securitizing these types of loans, as there are a few other major players in this type of lending and given the fact that risk weighting required for this type of loans is 100 %," said Shirley Chan, analyst at Moody's Investors Service.
It remains to be seen whether these other banks will opt for synthetic transactions, such as HSBC, or for a cash-based securitization. In this context, Chan adds that it is important to note that banks in Hong Kong are very liquid, and therefore not necessarily in need of funding, making the synthetic route a good option.
The transaction has inspired interest from other banks to securitize in synthetic format, in this asset class and other asset classes, said a source close to the deal.
Last week also saw the emergence of the largest mortgage securitization transaction in Hong Kong with the second deal of Hong Kong Mortgage Corp. under its Bauhinia program. In March of last year, the Hong Kong Mortgage Corp. launched its inaugural issue under its securitization program.
This year's deal, for a total of HK$3 billion, was led by HSBC. The structure was innovative, as the A1 notes, totaling HK1 billion, were structured as three-year soft bullets, which, after the first three years, could be sold back to the issuer. During this period, the notes would not be subject to any prepayment risk.
According to a source close to the deal, the key objective was to access a wider range of investors. The source added that some investors in the past were not investing in the mortgage product because they did not like the prepayment risk. This structure offered them to opportunity to invest without the presence of this type of risk.