Thailand was once expected to be a leading Asian source of asset-backed transactions, until the market volatility after the currency crisis in 1997 quashed the handful of securitizations in the pipeline. But now that signs of stability are starting to appear, some forward-looking arrangers are starting to scour the surviving pieces of the Thai economy for securitization opportunities.

Much has happened since the first securitizations were completed, with the number of potential players much smaller than it was before the crisis. Finance companies which originated most of the securitizations done to date have largely been liquidated, merged, or nationalized. After the government shut down 58 at a stroke in 1997, only 19 out of an original 91 are left. Banks were once likely sellers of credit-card and mortgage-backed deals, but that sector has also seen major consolidation. So far, the government has intervened in eight out of 15 commercial banks, while others await to be privatized.

Legally, Thailand has made progress: a long-awaited bankruptcy law was passed in March, designed to speed up the debt-restructuring process and make it easier for banks to recover problem loans. The measure followed passage of the first securitization law in June 1997, which removed most of the fiscal disincentives to securitization.

Although the market is now quiet, securitization by banks and finance companies will happen again once the economy improves, predicted Jim France, co-head of France & Hughes Ltd., a securitization advisory firm in Bangkok. "The likely sequence of events is, as the recovery continues, the level of non-performing loans will improve, banks will start to selectively lend, and liquidity will be sucked out of the system. Then there will be a need to raise money to fund growth, and people will start to look at securitizing their assets," he said.

Biggest Problem: Excess Liquidity

One of the biggest constraints for securitization is a high degree of liquidity in the domestic market. "Banks and finance companies which are still solvent have a lot of money, and they are looking to book rather than sell their assets. Demand for securitization is not there, particularly for performing assets," commented Mahesh Kotecha, president of Structured Credit International Corp. in New York, which is advising the Thai government on securitization through the Asian Development Bank. And until some of that liquidity is soaked up, banks and finance companies have no incentive to diversify their funding sources, he added.

Residential mortgages are often cited as an asset class ripe for securitization, especially as the Secondary Mortgage Corporation (SMC) has started buying mortgage portfolios from domestic banks with a view to being the first issuer of mortgage-backed bonds. Yet one of the biggest problems facing mortgage-backed securitization is the lack of a benchmark, said Kotecha. "The biggest single problem is that there isn't good asset performance information. Each bank can tell you its data, but you need to know not only each lender's performance but also its performance [relative] to the market," he explained.

Another factor inhibiting development of MBS is that the Government Housing Bank (GHB), the country's biggest originator of mortgages, is prohibited in its charter from selling assets to the SMC. And besides lacking historical data, the GHB has little reason to securitize since it can fund itself cheaply through the government, said France.

Going forward, the outlook for securitization by financial institutions like much else in the Thai economy will depend on how the government resolves the banking crisis. Domestic banks are burdened with non-performing loans that could reach as much as 50% of Thailand's GDP, Duff & Phelps said recently. For solvent institutions, disposal of NPLs and recapitalization will take priority over securitization or other funding plans, particularly since selling off mortgages or other healthy assets would only worsen the ratio of performing to non-performing assets, pointed out France.

Securitization has often been mentioned as one way to dispose of NPLs, but most agree that it would be extremely difficult to carry out in practice. One potential candidate is the Asset Management Corporation (AMC), the so-called "buyer of last resort" of distressed assets sold by nationalized banks and the Financial Restructuring Authority (FRA), the agency created in 1997 to liquidate the assets of bankrupt finance companies. To date, the AMC has paid Bt31 billion ($837 million) for assets with a face value of Bt185 billion, but it remains to be seen what it will do with them. "A lot of foreign financial advisers have come in to talk to us, and most of them suggest securitization. If there is an appetite for these assets, of course we will do that. But it will be a long time away," commented an AMC official.

Domestic-Driven Demand

Perhaps the biggest factor in favor of a domestic asset-backed market is the existence of an investor base hungry for high-quality investments. "Domestic investors don't have a lot of alternative investments that are attractive to them, and they want to invest in something that earns a decent return with good credit quality. The fact that investor demand is already there leads me to believe that once the market turns around, [securitization] will be an attractive source of funds," commented France. Another factor favoring domestic issuance is that originators are now in need of local currency rather than dollar funding, he added.

Indeed, some of the very factors hindering cross-border deals from Thailand are actually positive forces for developing the domestic market. The lack of historical mortgage data, currency swaps, and even investment-grade sovereign ratings are all factors that can spur domestic ABS issuance, while international investors, monolines and ratings agencies wait on the sidelines. "The lack of historical data could turn out to be positive for the domestic market, because alot of investors are going to be comfortable and familiar with Thai residential mortgages, for example. Even if they don't have a wealth of historical data from the seller, they still can do a credit analysis of the existing portfolio," France said. One deal that showed the growing interest in residential mortgages was the recent Bt4 billion issue, backed by mortgages bought from the FRA by Lehman Brothers. It was reportedly heavily oversubscribed by domestic investors.

Yet if the market takes off, the involvement of international financial guarantors and ratings agencies will be necessary, said Kotecha. "Foreign ratings agencies and monolines could play an important role in the Thai domestic market. It is something we are recommending," he added. - VC

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