Following a stellar 2005, the Malaysian ABS market looks set to carry the momentum into 2006 with synthetic structures due to be introduced soon. At least two transactions backed by loans to small and medium-sized enterprises are due for synthetic treatment, possibly in the first quarter of this year.
Cagamas, the state-owned secondary mortgage company and Malaysia's benchmark mortgage-backed issuer, is in charge of the project. The program is part of a wider government initiative to help SMEs access funding on more favorable terms than available through commercial bank loans.
Under the facility, market whispers say loans originated by Maybank and Overseas Chinese Banking Corp. (OCBC) will be transferred to an SPV established by Cagamas, which will then be packaged into two separate ABS deals.
Cagamas' role extends to paying transaction fees, and, rumors suggest, the agency is a potential buyer of the subordinated equity tranches of both issues.
The agency last summer selected Citigroup Global Markets and Aseambankers to work with the Maybank loans (Aseambankers is a Maybank subsidiary), and Deutsche Bank and OCBC to devise a structure for a portion of the latter's portfolio (ASR, 06/20/05).
Additionally, a third consortium involving Bumiputra Commerce Bank (BCB) and its parent, Commerce International Merchant Bankers (CIMB), could yet be part of the scheme.
According to well-placed sources, proposals by Citigroup-Aseambankers and Deutsche-OCBC were submitted to regulators late last year. However, the Securities Commission and Bank Negara - Malaysia's central bank - are notoriously cautious and, given the new technology involved, are being especially so in giving the go-ahead to both offerings.
Despite this, there is no regulatory impediment to doing a synthetic securitization in Malaysia. "There may not be any legal precedent, but I have had discussions with the regulators previously, and they seemed comfortable with the concept," said a banker well-versed in Malaysian ABS.
As Maybank and OCBC are among the largest active banks in Malaysia, some bankers not involved are curious as to the benefits either bank will gain from the exercise. "I see very few pluses for a synthetic deal other than to set a new precedent," commented one. "From the originator's perspective, if they wanted to offload the risk of some lesser credits on their books while still retaining the yield - assuming they don't have to pay up on the credit default swap pricing - then this could be of some value."
"However, for investors, unless there is a major pickup over comparables, buying a synthetic deal merely represents additional risks associated with settlement, definitions of credit events, true and competitive CDS pricing and rating agency analysis due to the lack of data," the banker added.
A well-placed source took the opposite view, telling ASR that local investors would likely garner some spread pickup over cash transactions while disputing the suggestion that synthetic transactions were of no benefit to originators.
"The deals will break new ground. It is because the banks do not need funds that they will go down the synthetic route, which will enable them to achieve regulatory capital benefits," remarked the source. "And given the first-time nature of the deals, pricing is likely to be slightly wider than cash offerings, so investors will be rewarded for participating."
As for the BCB-CIMB tie-up, sources say the two banks will look to see how successful the other transactions are before deciding what path to take. If the early deals reveal obvious benefits, BCB loans will be transferred to the Cagamas SPV. Otherwise, the two banks will market their transaction independently.
BCB and CIMB formed a strategic alliance last November with the state-run SME Bank, which will see them extend M$1.5 billion ($400.5 million) of loans to small companies. All loans will be fully guaranteed by SME Bank. It is not clear whether those assets or a pool derived from BCB's own Fast Track program will be securitized.
Meanwhile, CIMB - comfortably Malaysia's dominant ABS arranger - has secured sole arranger and bookrunning duties on another deal involving BCB. Sources say Proton Commerce Sdn Bhd (PCSB) will launch an auto loans ABS in March or April with the size of the program to be decided.
PCSB is a joint venture between Proton - Malaysia's biggest domestic car maker - and BCB, created in 2003 to provide financing to purchasers of Proton vehicles.
It is not the first Malaysian deal involving Proton assets. In January 2005, consumer finance company AmFinance issued a deal involving auto hire purchase receivables. Around 67% of the vehicles securitized were manufactured by Proton.
The M$500 million offering, arranged by AmMerchant Bank and issued via the Cepat Assets SPV, featured five triple-A rated tranches with maturities stretching from one to five years. The longest-dated piece paid 5.60%, a 200-point spread over government bonds (ASR, 02/07/05).
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