Although Japan and the Republic of Korea continue to be the two largest Asian ABS markets, with the implementation of The Financial Assets Securitization Law of June 2002, some say that Taiwan could soon become a serious contender for third place.
Andy Lai, managing director and head of the financial engineering group at Societe Generale, which completed the first deal out of Taiwan, says that approximately 10 lead mandates have already been awarded. Further, he adds, Taiwan could be poised to take a larger share of the overall Asian market this year, especially as Korean deal flow seems to be declining versus previous years.
The fundamentals all seem to point to a bright future for Taiwanese securitization. It is the fourth largest economy in the Asian region, with a GDP at NT$9.7 trillion (US$279 billion), and a 3.9% growth in 2002.
Moody's Investors Service has drawn comparisons with the incipient Japanese and Korean markets, and says that when the Taiwanese market reaches a similar stage of maturity as those of the above, the potential size of the securitization market could reach between $6 billion and $18 billion (U.S. equivalent), based on its nominal GDP for 2002.
There is currently a large pool of assets ready for securitization. As of March 2003, the Central Bank of China estimates that in the banking sector, there are a total of $78 billion (equivalent) in residential mortgages, $9 billion (equivalent) in credit cards and $2 billion (equivalent) in auto loans.
While residential mortgages, credit cards and auto loans are the assets earmarked for securitization by the Ministry of Finance, other assets can also be securitized with prior approval, even though the legal framework is at present geared more toward the securitization of financial assets rather than corporates.
Other potential assets on the horizon could be commercial properties, as well as trade and export receivables generated by the manufacturing industry, which accounts for 40% of Taiwan's GDP.
Two deals have so far closed this year; they are two CDOs, and include a NT$3.65 billion (US$104.8 million) collateralized loan obligation arranged by Soc Gen and Industrial Bank of Taiwan (IBT). The second deal was a CDO backed by convertible bonds issued by a number of mid-sized companies and completed earlier this month.
A deal is in the pipeline for World Peace Industrial, the Taiwanese semi-conductor company, and is backed by trade receivables. Soc Gen and IBT are also acting as arrangers on this deal.
Soc Gen and IBT have established a joint-venture in the Taiwan market, and Greg Medcraft, who heads, among other things, Asian securitization at SocGen, commented that, "The strategy for the Asian securitization group at SG is to develop local securitization markets, and we look to do this by developing partnerships with domestic banks." Medcraft added that Soc Gen has a similar arrangement in Malaysia.
As competition has grown in the Korean market, with numerous banks chasing every mandate, it has had an impact on underwriting margins, so that many international investment banks have sought new securitization markets to develop. Taiwan is a prime example. However, there are initial indications that even this market could be getting crowded, as the list below indicates.
In the pipeline are at least five to six RMBS deals including: a deal for Chinatrust Commercial Bank arranged by Lehman Brothers; one for First Bank arranged by Deutsche Bank; another for Taishin International Bank, led by Citigroup; and ING Barings is structuring an MBS deal for another Taiwanese bank.
But market participants point out that the above asset class could encounter some structuring problems, as the registration process for RMBS is very cumbersome and would benefit from a centralized registration system.
Other asset classes being structured include a credit card deal for AETNA Sinopac, which will probably be placed in ABN Amro's conduit, and a consumer loan deal for Cosmo Bank with HVB Group as arranger.
The future development of the market will also depend on the investor base, and progress also hinges on further structural initiatives by the government to address the legal and regulatory hurdles still present, as well as the larger infrastructure inadequacies present in the market. Another important consideration: banks already have access to liquidity and therefore might not have the appetite to go down the securitization route.
The other question is cross-border issuance. Will the market develop from its domestic base? And if it does, how soon will this occur? The monoline insurers have been pivotal in establishing cross-border outlets for emerging markets, as seen in Korea. At present, the Department of Insurance is said to be working on soliciting the involvement of established foreign monolines.
But as Rick Holzinger, managing director at Financial Security Assurance, explained, "Although the fundamentals all seem to be working towards the creation of a securitization market, and the government has made great strides with the law, I don't think that the economics are there in terms of making the market work for high volume cross-border issuance."
"This is because there is an active local investor base, and the cost of doing a cross-border transaction will probably not make it as attractive for issuers as using the domestic market in the near term," he added.