The Government of Singapore is the latest Asian government to be lured by the benefits of securitization. According to sources familiar with the mandate, SPRING, the state-controlled agency that supports the financing needs of small and medium sized entities (SMEs), has selected DBS Bank as sole lead on a deal backed by SME loans.
DBS fended off bids from Barclays Capital, HSBC, Maybank and Standard Chartered in a selection process that took months to resolve. In the end, and as expected for what will be a high-profile deal for the city-state, the government went with a local house.
Size and timing details have not yet emerged. However, it is believed DBS and SPRING are now warehousing loans.
Government-sponsored securitization in Asia has surged this year and shows no sign of abating. The Hong Kong Government set the ball rolling in April with its HK$6 billion ($772 million) offering via HSBC, backed by tunnel and bridge toll revenues. The high profile deal, the biggest ex-Japan Asian securitization ever, was a blowout, with the institutional tranches four times oversubscribed and retail pieces three times covered (ASR, 5/10/2004).
Impressed by the unprecedented interest generated, not just in Hong Kong but also across Asia, the Malaysian Government decided to try its hand. Cagamas, the state-run secondary mortgage company, in October completed the country's first RMBS (ASR, 10/18/2004).
Bumiwerks Capital Management structured the M$1.6 billion ($421.1 million) issue, with Aseambankers and Commerce International Merchant Bankers handling the domestic placement and Standard Chartered brought in to target offshore investors.
Again, the sale went better than anyone expected, with 5.6 times oversubscription. Contrary to speculation suggesting offshore investors - basically foreign institutions with Malaysian custodian accounts - would not be interested in ringitt-denominated ABS, foreign investors bought 22% of the notes.
The Malaysian government and Cagamas officials were so impressed that they recently sent out request for proposals for an Islamic MBS. A decision on that is expected soon, with HSBC and Standard Chartered again among the bidders.
Senior Asian ABS bankers have told ASR this only represents the tip of the iceberg, with similar initiatives underway in Korea, Taiwan and Thailand.
While rumors of government securitization have always circulated around Asia - with everything from gas revenues (Indonesia) to gambling profits (Philippines) allegedly being looked at - the most respected bankers always scoffed at the stories. Until now.
Previously, governments might have been attracted to ABS as a means to deepen domestic capital markets. But when it came to decision time, they always balked at how much more expensive securitization seemed compared to other funding sources.
However, with the ABS investor pool in Asia broadening significantly, both the Hong Kong and Malaysian government transactions priced attractively. According to a banker involved on the tunnels deal, net pricing for the institutional tranches was Hibor plus 7 basis points on a weighted average life of four years. That compares favorably with straight debt, as eight-year sovereign paper currently trades at 14 basis points.
As for Cagamas, spreads over Malaysian government paper with the same maturities were 18 basis points for three years, 26 basis points for five, 38 basis points for seven and 45 basis points for 10 years.
Aside from achieving impressive pricing for first-time issuers, spread levels were well inside previous Hong Kong and Malaysian securitizations. Wide pricing has been a major hindrance to the development of ABS in those countries. So, aside from attracting other Asian governments, Cagamas and the Hong Kong government may have given real impetus for corporate borrowers to tap ABS-hungry investors.
Meanwhile, another SME-related transaction priced last week. Nomura Securities is lead manager and swap provider on the Y7.6 billion ($73 million) primary CBO, having been appointed by the Korean Ministry of Finance and Economy, with support coming from Korea's Daishin Securities.
As part of the Asian Bond Markets Initiative, the deal - backed by securities issued by 46 Korean SMEs - is a pan-Asian affair. The lead managers and the guarantors are all from the region, the SPVs are incorporated in Singapore and Korea and it was pitched only to Asian accounts, with most interest from Japan.
At closing, the 46 SME bonds were sold to a Korean SPV, called SME VI Special Securitization Company. The SPV then issued a yen-denominated senior bond, which was purchased by the Singaporean SPV - Asian Bond Fund 1. That SPV then issued senior notes, with payment schedules mirroring the senior bond, which have now been sold to investors.
Government agencies Industrial Bank of Korea and Japan Bank for International Cooperation are guaranteeing the deal. The issue has a three-year legal maturity, with 30% of the remaining principal to be paid after two years. The coupon is 20 basis points over three-month Yen Libor and are rated AAA'/'AA-' by Moody's Investor's Service and Standard & Poor's, respectively.
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