Financial crisis could be positive for securitisation in Asia

The region comprises countries with distinctive and diverse cultures, different stages of economic development, sovereign credit quality, currencies (several of which are not widely traded in foreign exchange and swap markets), regulatory environments, and legal systems. Legal precedent is scarce for securitisation issues, and without the ability to write legislation to facilitate securitisation, these obstacles add layers of complexity for issuers and transaction participants, and increases time and costs of execution. For investors considering some of these newer markets, it may be too demanding to invest the time and effort to understand the complexities of an individual market if they aren't certain they'll be rewarded with a flow of ongoing opportunities in the future. 

With the exception of Australia and New Zealand, historically Asia-Pacific's securitisation markets have been opaque. However, a growing global emphasis on market transparency, led by the International Organisation of Securities Commissions (IOSCO), may help to change this. Initiatives are underway in the US (Project Restart) and in parts of Asia-Pacific. For instance, Japan's Securities Dealer Association introduced the SIRP, or Standardised Information Reporting Package, on June 1, 2009, to help improve transparency and comparability among transactions.

While global and local policy-makers are developing and implementing various reforms, the ultimate impact of specific changes, as well as the combined effect of the myriad of local and global reforms, remains uncertain. We believe it will likely take well into 2010 for the implications of many of these significant changes on the design of, and future demand for, securitisation products to become more apparent.

Nevertheless, it's likely that for as many doors that close, others will open. We believe securitisation can and will continue to provide valuable contributions to the credit creation process, risk management, and funding diversification needs and imperatives of issuers, investors, and policy-makers. 

Catalysts of change may drive greater regionalisation

Despite these challenges to recovery and growth, changes seem to be emerging across the region. A noteworthy one is the rise of Asia-Pacific as an economic power. The region has become a significant global force in terms of the world's investable funds, and it's home to two of the world's economic growth engines, China and India. This has fueled a growing sense of independence and confidence.

Asia-Pacific investors are also significant holders of US securitisation in particular and as a result of the crisis some of these investors are beginning to rethink their strategies to include a more regional focus. In our opinion, this might be evidence of a positive effect from the global financial crisis on Asia-Pacific, especially when it comes to the future development of its domestic capital markets, securitisation capability, and greater regional integration of its financial markets.

With increasing intra-regional trade and investment flows, and the push by regional policy-makers toward closer integration of business and capital markets, over time, regional investors are likely to encounter a broader cross-section of asset classes and currency opportunities for investment. These options may become an attractive alternative or a complement to investments in their own markets, and the larger US and European markets. In the long term, regional investors may be able to construct diverse regional fixed-income portfolios, which may lead to shifts in investment styles.

In our opinion, Asia-Pacific's more established securitisation markets will likely recover, reinvent themselves, and find new ways to bring value and opportunity to investors, issuers, markets, and economies in the region. For instance, this year brought the first covered bond issue in Asia by Korea's Kookmin Bank. For the less developed emerging markets, continued efforts of policy-makers and a compelling value proposition emerging for securitisation in those markets will, in our opinion, be needed to underpin development and growth of those markets. 

Commitment and collaboration are key

Restoration of investor confidence in securitisation markets is at the core of recovery and future growth in the sector. While time is a healer, the region also needs to take tangible steps to help boost investors' confidence in securitisation and to foster increased regional collaboration to develop Asia-Pacific's securitisation markets. In our opinion, such steps need to focus on:

• Improved transparency, standardisation, and access to documentation, data, tools and models to help investors make more informed investment decisions with less reliance on rating agencies;
• Clarity, harmonisation, and/or mutual recognition between global securities regulators, bank regulators, and accounting standard setters;
• Increased education about securitisation products to better inform potential investors of their relative strengths and risks;
• Increased coordination between industry bodies to understand local and regional investor preferences and needs in terms of transparency as well as asset and structural preferences;
• Ensuring that securitisation markets in Asia-Pacific are up-to-date with global regulatory and industry standards and developments, so as to keep the door open to global markets and investors when the markets pick up, which we believe will inevitably occur;
• Ensuring the simplicity, quality, and performance of new issues, because, in the long run, performance will speak for itself; and
• Ultimately striving for an ideal state where regulatory safeguards provide protection without stifling innovation, and the short-term benefits of leverage and cheap funding are balanced against longer-term stability and sustainability. 

The broader market fundamentals and drivers in each country, as well as policy-makers' aspirations, may provide clues as to how and where securitisation may emerge more strongly. They may also identify areas where the financial industry and policy-makers can work together to innovate and address market gaps. If they sustain a commitment to change, we believe greater collaboration will draw countries toward each other, and attract regional investors to new opportunities.

In our opinion, securitisation will be a viable funding, risk-management, and debt-structuring technique for Asia-Pacific companies and financial institutions, while at the same time providing more fixed-income investment opportunities to regional investors.

The author of this article, Fabienne Michaux, is a managing director of structured finance for Asia-Pacific at Standard & Poor's. 

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