Australia's growth will continue to be dominated by residential mortgage-backed deals in 2007, with originators benefiting from significant demand from local and international investors. However, observers will keep an eye on the level of delinquencies, which are creeping upwards as interest rates rise.
Currently, delinquencies are nowhere near a level that might affect transaction performance. Nevertheless, going forward, originators wanting tightest spreads will not be able to mix low-documentation mortgages - the sector with the highest delinquency rates - into otherwise prime deals.
The coming year is also likely to see further asset-class diversity in Australia, with commercial mortgage-backed offerings and balance sheet CLOs to the fore.
China's embryonic ABS market had a quiet 2006, as regulators adopted a cautious approach to approving new deals. The next 12 months are likely to see the shackles come off and a real surge of issuance from financial institutions and corporates.
Non-performing loan securitization will be to the fore early in 2007. Cinda Asset Management Co. and Orient AMC have already received approval for NPL deals. Later in the year, consumer finance transactions can be expected from the likes of Bank of Shanghai and China Merchant Bank.
Next year should see further offshore CMBS deals backed by Chinese properties, replicating the success of Macquarie Wanda Real Estate Fund's landmark $145 million transaction in October. One entity known to be working on such a deal is GZI Real Estate Investment Trust - Hong Kong-registered, but investing solely in Chinese assets. GZI REIT has hired Citigroup Global Markets and HSBC for a $150 million deal, due for launch early next year.
Japanese securitization saw a spate of mega-transactions in 2006, a trend set to continue throughout 2007. RMBS should continue to be the dominant asset class, accounting for over half the issuance in recent years.
Deals backed by state assets may also emerge, with the Japanese government due to begin securitizing loans and real estate; a program that could see 140 trillion ($8.5 million) of issuance over the next decade.
Cross-border volumes from Korea are expected to surge in the next 12 months, with several banks known to be interested in establishing RMBS vehicles. The current environment is excellent for Korean borrowers, which enjoy tight pricing via both the public and conduit markets. Issuance of consumer finance transactions should also show strongly.
Malaysian activity is due to rebound in 2007 after volumes dipped this year. Secondary mortgage agency Cagamas, the country's benchmark RMBS issuer, will return to market after staying on the sidelines in 2006.
Another government agency, Credit Guarantee Union, could follow Cagamas' lead. CGU is working with Germany's KfW Bankengruppe on a securitization of loans to small and medium sized businesses. RCE Capital, the civil service lending specialist, is likely to sell the first deal from a M$1.5 billion program early next year.
CMBS activity, particularly from real estate investment trusts, is likely to dominate Singaporean securitization activity in the next 12 months. The city state's issuers have seen spreads contract substantially in the past two years to the point they no longer have to pay more than a one or two point premium on equivalent deals from Europe.
Outside of CMBS, the most interesting transaction in the works from Singapore will come via Singapore Aircraft Leasing Enterprise. The company is working with Citigroup on a securitization of aircraft leases; an asset class it believes could eventually total between $1 billion and $2 billion annually.
Taiwan's market of late has been dominated by CDO activity related to the repackaging of structured products. This is likely to continue in the first half of 2007, with additional issuance of between NT$75 billion - NT$100 billion expected. RMBS - an asset class kept alive recently by just one issuer, Hsinchu International Bank - is expected to come to prominence in 2007. On the cross-border side, a first auto loans ABS by the Taiwanese subsidiary of Ford Motor Co. should see the light of day in the first quarter.
In relative terms, Thailand is a small market, but some veterans expect this to change in 2007. With the government due to abolish withholding tax on offshore transactions early next year, significant cross-border volumes can be expected.
Leading the charge will be Government Housing Bank, which plans to sell the first deal from a THB40 billion program in the first half. GHB - also Thailand's largest mortgage originator - plans to raise TH30 billion in the international market.
On a broader note, the region is likely to see the first wave of acquisition financing of Asian companies by U.S. and European private equity firms. Reputable sources say at least six transactions are likely in 2007, with Australian, Korean and Japanese assets keenly sought.
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