Financial crisis could be positive for securitisation in Asia

The availability of cheaper and easier financing alternatives and the diverse market environment are impeding the growth of securitisation markets in the region, but there are signs of change, argues Standard & Poor's.

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From Shanghai to Sydney, the Asia-Pacific region contains a rich tapestry of diverse cultures and economies. The spectrum is also broad in terms of each country's sovereign creditworthiness, economic development, and market sophistication.

While some countries possess legal and regulatory structures to support domestic and cross-border securitisation markets, relatively few have well-developed capital markets by international standards, and fewer still have the legal framework, stability, scale, and operational infrastructure to support vibrant and stable securitisation sectors.

Although data on the aggregate size of the securitisation markets in Asia-Pacific is not readily available, in the below table we estimate the current securitisation outstandings by country.

Despite a strong history of trade cooperation and agreements within the region and beyond, Asia-Pacific's domestic capital markets are fragmented. Consequently, Asia-Pacific investors have tended to look to the US and European markets for investment opportunities rather than to their own region. Standard & Poor's Ratings Services believes these factors impede the growth and recovery of individual securitisation markets, as well as efforts to foster greater regional cohesion.

However, we also believe the global financial crisis, a growing sense of independence and confidence in the region, increasing wealth, and a desire by several policy-makers to foster greater regional cohesion may spur changes that will improve the region's long-term prospects for greater integration of capital markets and the ongoing development of securitisation markets around the region.

The impact of the global financial crisis

The impact of the global financial crisis on individual countries has underscored the diversity of Asia-Pacific's securitisation markets. The effects vary both by nature and degree among the individual markets, with the most pronounced occurring in securitisation markets with the following characteristics:

  • Markets with heavy reliance on cross-border investors and, in particular, structured investment vehicles (SIV)/conduit investors -- for example, Korean cross-border transactions and Australian residential mortgage-backed securities (RMBS);
  • Sectors where foreign banks dominate securitisation activity. After the crisis, a few of these banks have scaled back or exited noncore markets -- for example, the Japanese conduit commercial mortgage-backed securities (CMBS) sector;
  • Sectors where securitisation was the predominant source of funds -- for example, the Australian non-bank RMBS sector and Japanese conduit CMBS sector; and
  • Jurisdictions where government interventions to protect and stabilise the banking systems had broader unintended consequences for securitisation. This was most pronounced in Australia.

And yet, the credit performance of most Asia-Pacific securitisation transactions remains sound.  In our opinion this reflects several factors:

The relative strength of banking systems and asset quality in the region leading into the global financial crisis

The Asia-Pacific countries have endured and recovered from several shocks to their financial systems in the past few decades, leading to significant structural reforms in many of the region's financial markets. These events include Australia's recession in the early 1990s, which revealed significant credit quality issues in several banks; the 1997/1998 Asian financial crisis; Korea's credit card crisis in 2003; and Japan's decade of restructuring following the bursting of the 1990s asset price bubble.

As a result of these events, the region's banks recapitalised, improved risk management and credit systems, and maintained higher credit quality through the most recent credit boom relative to their US and European counterparts. In particular, subprime lending comprised a negligible proportion of regional banking assets.

The performance of Asia-Pacific's economies relative to other regions

The economic deterioration started later in Asia-Pacific than in the rest of the world, providing a strong performance buffer for a large proportion of the region's amortising transactions, which have relatively short weighted-average lives and sequential payment structures. In addition, the slowdown was shallower and the recovery started earlier than in the US and Europe.

Further, lower interest rates resulting from looser monetary policies have, to a certain extent, alleviated the financial stress among borrowers and offset the impact of modest rises in unemployment on delinquencies and default rates of consumer portfolios.

The nascent state of Asia-Pacific's securitisation markets 

Asia-Pacific's securitisation markets are relatively less mature and lack the depth and scale of markets in the US and Europe. Further, the Asian cultures are far more traditional in their use of credit, demonstrated by their very high savings rates. As a consequence, only a small proportion of securitisation transactions in Asia-Pacific comprise highly leveraged loans, or loans to lower credit-quality borrowers, who are most vulnerable to performance issues when economic conditions deteriorate. 

Further, reflecting the lack of market depth, scale, and maturity, transaction structures remained quite straightforward. For instance, very few transactions relied on the ability to resell assets in a liquid market to repay noteholders.

The path to recovery and growth may not be easy

Each market within the Asia-Pacific region may have to forge its own path to recovery and growth, depending on local conditions. In our opinion, this process may not be easy, due to the region's longstanding challenges to the development of securitisation. In addition, the extent and timing of global and local regulatory and market developments in response to the global financial crisis will likely play a part, as uncertainty around the scope and timing of these developments and their impact on securitisation markets may stall recovery efforts.

Asia-Pacific's domestic banking systems are highly competitive, with a strong emphasis on relationship banking. Further, high savings rates in most markets (except in Australia and New Zealand) provide banks with a low cost, stable base from which to fund lending, as the savings comprise predominantly bank deposits. This reduces the impetus of the banks to use securitisation to diversify and/or increase their funding bases.

Indeed, for many potential issuers of securitised products in Asia-Pacific, securitisation is not a necessity. For instance, Hong Kong, which has one of the most developed and international capital markets in the world, has had only a nascent securitisation market for years due to easy availability of competitive bank financing. For individual securitisation markets to grow and prosper, in our opinion, securitisation would need to provide a compelling value proposition relative to other funding sources.

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