Lehman Brothers' new Thai securitization may not be the catalyst for an outpouring of securitizations from the region, but it has certainly served to push this market's progression one step forward.
GT Stars II is the first rated securitization transaction from Thailand, although there have been earlier transactions, including GT Stars1. "In terms of Securitization of this type of asset in the region, the transaction does signify progress in that there is no recourse to the originator or seller of the underlying assets," said Ben McCarthy, a Fitch Ratings analyst in the Hong Kong office. "The repayment of the bonds will rely purely on the cash flows from the underlying assets. This is in contrast to some of the Korean deals that have relied on put options to the seller for credit enhancement."
The first deal, GT Stars1, was privately placed and completed in 1999 shortly after Lehman's acquisition of a government owned portfolio.
As McCarthy explained, Lehman was in a fairly unique position in Thailand in that it had purchased the two underlying portfolio's - one in 1998 and a subsequent buy in 2000 - at a discounted price; as a result, the portfolios had already effectively been written down.
"For another entity (presumably a bank) to come to market they would have to follow a similar procedure, and for a bank that has not fully provisioned for the loans, this could be quite painful," he said. "Fitch does not expect a large volume of transactions of this type, although we do believe that the success of this transaction will encourage others to canvass the option."
The payment cash flow for GT Stars II is derived predominately from two portfolios of performing and non-performing loans - with NPLs comprising at least two-thirds, and restructured loans accounting for 16%.
Fitch has assigned a national long-term rating of single-A to the notes. The proceeds from the issue will be used to purchase the rights to receive a stream of the cash flows arising from the two funds. Concurrently, a private investor through the special purpose company Tenerat will fund a loan component of THB2.5 billion.
Fitch's asset analysis focused on two elements - the amount to be collected from the underlying assets in a given stress environment, and the timing of these collections.
In its assessment of timing, the rating agency looked at the servicer's strategy and ability to process the loans, as well as the court process in Thailand. Delays in navigating the court system were budgeted for.
On the asset side, the volatility and variability of valuation has posed a problem, particularly because the database in Thailand is not extensive. Lehman, however, has built up reliable valuation based on a foundation of 20,000 loans.
Fitch incorporated in its rating process "an across the board haircut of 10%" in order to comply with its modeling purposes.
While not an issue for the GT Stars transaction, there does appear to be a legal impediment to the securitization of future cash receivables in Thailand. The issue specifically relates to the fact that there is uncertainty whether a Thai court will give effect to the sale of yet-to-be-created receivables. "One of the benefits of the GT Stars transactions is the sheer volume of loans and the fact that it is retail based. The historic collections record and the lack of concentrations to single obligors makes the analysis easier than it would be for a single property or obligor," said McCarthy.
It is this uncertainty that contributes to the lack of development of securitization of certain asset classes in Thailand.
At a Fitch conference in London earlier this month, panelists said the complex and inefficient foreclosure laws and vagaries of the local legal system - as well as uncertainty of collateral valuations, the legal status of SPVs, and tax liabilities on asset transfers to SPVs - are barriers that stunt the growth of the Thai securitization market.
But the interest is certainly there, added McCarthy. He said that Fitch receives regular inquiries with regard to securitization in the region. "Other than non-performing loans, Fitch has had inquiries on property-related securitization and consumer receivables; however, the inquiries are very preliminary with the market in its infancy."