Chinatrust's RMBS comes in from the cold

Lehman Brothers finally closes Chinatrust''s debut mortgage securitization.

Chinatrust Commercial Bank has finally launched its NT$5 billion ($146 million) mortgage securitization, 10 months after becoming the first to win regulatory approval. Since then two other residential mortgage-backed deals have closed while Chinatrust has sat on the sidelines.

But Chinatrust's deal, according to Patrick Kaye at arrangers Lehman Brothers, is a more significant transaction than the two earlier deals, from First Commercial and Taishin International, respectively arranged by Deutsche Bank and Citigroup. Both offered a coupon based on the adjustable rate mortgage (Arms) index, which is not commonly used to price anything other than mortgages and is not hedgeable.

The Chinatrust deal, on the other hand, is priced against three-month commercial paper - a more conventional pricing benchmark.

The deal's first incarnation was a private placement, like the first two deals, but that deal was scrapped in favour of wider distribution through a public offer, using brokerages Grand Cathay Securities, Yuanta Core Pacific Securities and Fubon Securities. "Of course, everyone wants to be first," says Kaye. "But Chinatrust has taken a very sensible, disciplined approach to this deal, investing the time to do the deal they really wanted done."

The deal comprises mostly triple-A notes, totaling NT$4.33 billion, which are priced at 25bp. Both previous deals priced at exactly the same level against the Arms index, which is about 40bp higher than the commercial paper rate - though both indices are highly correlated.

There are also three smaller, lower rated tranches and a NT$176 million subordinated tranche that represents 96.5% leverage; better than the previous deals. The NT$250 million class-B bonds are rated twAA by Standad & Poor's affiliate Taiwan Ratings and offer a coupon of 55bp, with 9.07% credit support. The NT$150 million class-C notes are rated twA and pay 80bp, with 6.09% credit support. The NT$130 million twBBB class-D series is priced at 125bp on credit support of 3.5%.

The bonds are backed by a pool of 2,723 first lien mortgage loans. All the loans were originated after January 2002 and are on average 19 months into repayment. The weighted average loan-to-value is 73% and the average outstanding balance is NT$1.8 million.

Although the deal took far longer than Lehman could ever have expected, Kaye says the bank is extremely pleased with the deal. "If we continue to print deals like this we will be able to go out and compete on something other than price," he says, adding that the bank is patricularly bullish on the Taiwan market. "You don't see these kinds of unenhanced, pass-through securities being issued in Korea."

Chinatrust eschewed the trend for eye-catching monikers by naming the special purpose trust Chinatrust Commercial Bank 2004-A. The trust acquired the mortgages from Chinatrust and is the issuer of the bonds. Local lawyers Lee and Li advised on matters of Taiwanese of law and Orrick Herrington & Sutcliffe advised on issues relating to the structuring of the transaction.