In the last few weeks, activity in the Taiwan market has picked up. The SARS virus was one of the key reasons for the slowdown in the development of the Taiwan market, says Andy Lai, managing director and head of the financial engineering group at Societe Generale. SARS affected travel to the region, and consequently led to the postponement of many transactions.
There has also been a slowdown in issuance, says Lai, due to problems associated with mortgage transactions, as the registration system remains a major impediment to structuring RMBS transactions. This continues to delay the process. However, Lai believes that this could be resolved very soon.
Market participants believe that the RMBS being worked on for China Trust could be the first one to be issued out of Taiwan.
According to a recent report by Standard & Poor's (Taiwan mortgage securitization industry lacks centralized data supply' dated 18 June 2003), a problem for RMBS securitizations is that there is no public official information to track historical housing prices in Taiwan. But with the establishment in December 2002 of the Taiwan Institute for Real Estate, S&P expects this process to become more transparent.
S&P and its joint-venture partner, rating agency Taiwan Ratings Corp., say that they have carried out substantial research with the aim of developing effective criteria for rating residential mortgage-backed securities deals. They emphasize that the research is crucial to understanding the risks associated with mortgage loans in Taiwan.
Until now, the rating agencies have been hampered in their ability to rate these deals by the lack of available information on property prices and mortgages as well as mortgage portfolio data. They point to other difficulties, such as the lack of information on delinquencies and write-offs for residential mortgages and other forms of consumer debt.
There are other outstanding issues: "We are waiting for the tax bureau to resolve some tax issues, which would be beneficial for structured deals going forward. The issue that we identified earlier in the year concerning voting rights has now been rectified as of last week. This permits the most senior class of creditor the ultimate rights to vote and not to be vetoed by junior classes," says Diane Lam, director in the structured finance group at Standard & Poor's.
Standard & Poor's says that it has managed to develop assumptions on the property prices and on their decline, as well as been able to conduct specific research on housing supply and demand fundamentals for the purpose of developing rating criteria for Taiwan's RMBS market. S&P says that one of the most time-consuming tasks for banks seeking to securitize their mortgages is the availability of detailed information on the mortgage portfolios.
Lam at S&P explains that following their research over the summer, S&P will be in a position to rate a RMBS deal. "We have seen data from several originators, and we have been able to test our criteria/rating assumptions," she says. "Overall, we are now very comfortable with our understanding of how property cycles behave in the sub markets (for instance Taipei property market vs. central Taiwan or South Taiwan property market), and also, general default expectations at various rating stresses."
S&P has drawn other conclusions. For instance Taiwan, like Japan, is located in a high-risk earthquake zone - and S&P estimates that around 1% of Taiwan's banking sector total loan portfolio was affected by the large earthquake in 1999. Therefore, since April 2002, all new mortgages require insurance coverage for earthquakes. S&P also points out that mortgages have been under pressure in Taiwan because of the slowing economy and high unemployment within some regions. S&P highlights the depressed economic situation since 2001, and points to losses on some of the banks' portfolios because of increased defaults. However, mortgage loans extended after 2001 have outperformed previous mortgages, S&P notes.
In terms of the other asset classes that could emerge soon, Lai at Soc Gen confirms that both Soc Gen and IBT continue to work on the trade receivables transactions for World Peace Industrial, the Taiwanese semiconductor company. "We are hopeful that this deal will emerge by the fourth quarter of this year," he added.
Although the legal framework is more geared toward the securitization of financial assets rather than corporates, Lai still expects that assets securitized could also include real estate. "We expect that the scope of assets securitized could widen from corporate loans, mortgage loans, credit cards, consumer loans, to also encompass real estate assets," says Lai at Soc Gen.
One of the reasons is that a new securitization ruling for real estate assets was passed in July 2003. "Although real estate securitizations were under discussion for a long while, it was not included in the Financial Assets Securitisation Regulations enacted in June last year, and in July this year Real Estate Securitization Regulations were eventually enacted and there is therefore the potential for real estate deals to happen, " says Lai.
For instance, Soc Gen and IBT have just obtained a mandate from Tong Yang Chia Hsin International Corporation, an affiliate of one of Taiwan's leading cement manufacturers, to securitize an office building in downtown Taipei called the "IBM Tower."
In terms of market growth Lam says she is cautiously optimistic, saying, "We hope that more deals will come into the market, mostly RMBS and CLO. Having more deals is one way to help the market grow. In this way, more people can focus on the issues particular to an asset type, which would also be good for investors and regulators."