Taiwan closed its first residential mortgage-backed securitization last week, and sources say at least two more are on the way. It is the start of what some believe could be a busy year for the developing asset-backed market in that country.
Analysts say the pipeline of deals is long, including RMBS, CMBS, CLOs, trade receivables and consumer assets such as auto loans.
The Taipei branch of Deutsche Bank took the honors as the first to complete an RMBS transaction in Taiwan, with pricing tight enough to raise eyebrows. Deutsche arranged the Taiwan dollar (NT$) 4.28 billion deal for First Commercial Bank.
Citigroup Global Markets is working on what is expected to be the next RMBS deal in the market. The transaction, for Taishin Commercial Bank, is due by the end of March, and the size is estimated at NT$5 billion.
Citi is also busy on an RMBS deal for Chang Hwa Commercial Bank. The timing on that deal is uncertain, but it is expected to be worth about NT$5 billion as well.
Residential mortgages are the third type of asset to be securitized in Taiwan, after corporate loans and cash card receivables.
The inaugural deal, issued through First Commercial Bank 2003 Special Purpose Trust, is backed by first-ranking mortgage loans on residential properties in northern Taiwan.
The floating-rate certificates are structured in four tranches, three of them rated by Taiwan Ratings Corp., the Taipei-based affiliate of Standard & Poor's. The coupon is linked to local adjustable-rate mortgages (ARMs).
The ratings and reported pricing are: NT$3.91 billion in class A certificates, rated twAAA', at 25 basis points over ARMs; NT$220 million in class B, rated twAA', at 55 basis points over; and NT$150 million in class C, rated twA', at 65 basis points over.
First Commercial is believed to have retained the unrated and fully subordinated class D. The size of that tranche was not disclosed.
Sources said the upcoming Taishin deal would also have four tranches. Like First Commercial's deal, three of the tranches will be rated by Taiwan Ratings, with an unrated fourth tranche retained by Taishin.
But the ratings on some of the tranches in the Taishin deal are expected to be lower than those for First Commercial - twAAA', twA' and twBBB'.
Sources said they also expect Taishin to have a floating-rate class, priced against ARMs.
But several bankers familiar with the market said they do not expect future deals to sell at the same low level as First Commercial. "The investment base is still limited and the product is still new," one banker said. "So there is still some premium that has to be paid."
The First Commercial pricing is squeezed so tight market observers have been speculating that the deal found buyers mostly among banks, rather than among other types of investors. One banker said the pricing equates to an eyebrow-raising 25 basis points over two-year government bonds for the senior tranche, remarkably tight for a new asset class.
The legal final maturity for the First Commercial deal is April 2033, but the weighted average life is two years. The wide difference is a factor that could make it appealing to different investors, one source said.
Describing Taiwan's nascent asset-backed market, the source said that banks and insurance companies are the primary investors, and they have different investment preferences.
"Given the nature of RMBS, the legal tenure is quite long, 20 to 30 years. But the prepayment rate is high. So the weighted average life is short," the source said. "From the insurance company point of view, the legal tenure is not a problem, but the weighted average life is a little bit short. They want a long-term investment. From the bank point of view, the weighted average life is OK, but the legal tenure is too long."
The market is trying to find a way to create wider investor interest for RMBS. "Hopefully, we can have some sort of breakthrough in structuring with the next transaction to match different investor types," the source said.
It appears there will be plenty of opportunity to practice. Some estimates floating around the market suggest as much as NT$50 billion in real estate securitization could make it into the Taiwan pipeline this year.
The list of potential issuers expands beyond banks and real estate companies. One name mentioned recently as eyeing the market is Shin Kong Life Insurance Company, which owns a significant amount of real estate that could be packaged into a REIT or CMBS deal, according to one observer. The company is said to be discussing its options with bankers.
But analysts expect many of the deals to be bench warmers for awhile. Taiwan's playing field is still new, and the grounds crew remains hard at work.
"The issues in Taiwan are many and deals are very complex to complete," said Diane Lam, an analyst with Standard & Poor's in Hong Kong. "But I do think we will see more deals this year."
Jerome Cheng, an analyst at Moody's Investors Service in Hong Kong, said some pending deals could take six months - or more - to bring to
the plate. "There are various areas that the bankers, the sponsors and [we] have to explore on the legal side and on the accounting side," he said. "For the very first
transactions, having a six-month execution time is not actually that long."