Cosmos secures first cross border securitization

Cash card becomes inaugural offshore issuer after marathon run up.

UBS and HVB have priced Taiwan's first cross-border securitization. The $230 million deal securitizes Taiwanese dollar receiveables from Cosmos Bank's George & Mary cash cards.

Bankers involved on the deal breathed a collective sigh of relief when the deal finally priced on Tuesday night after a year of work. At times it seemed the deal would never close. At the last minute Taiwanese authorities dithered over tax treatment on the NT dollar piece, edging the timetable further and further back.

And the book-build was hard work too. Offshore investors got the jitters when cross-strait tensions hit the fornt pages around the world following Taiwanese president Chen Shui-bian's controversial referendum proposal. At the same time the corruption scandal at Takefuji cast a bad light on the Asian consumer finance industry.

This is also the first time that overseas ABS investors have looked at a Taiwanese deal, so finally getting the deal away is a fair achievement. Perhaps unsurprisingly two-thirds of the notes ended up with Asian investors. One-quarter were sold in Europe and the balance went to US investors. The notes were bought by 22 banks and 11 asset managers and the deal priced at 93bp over one-month US dollar Libor, which looks a pretty good deal for investors on the face of it but is within the expected price range of 90-95bp over.

Similar Japanese cash card companies trade at between 90-105bp over for this kind of maturity but one banker involved on the deal says that the deal was not an arbitrage play on the offshore market anyway. The prime motivation for Cosmos, he says, was to diversify funding.

The arrangers are using a typical credit card structure. Cosmos will sell the receiveables to a trustee, which will then sell investor certificates to G&M Finance, a Cayman Islands special purpose vehicle (SPV), and the SPV will issue the USD notes.

The senior notes have a six-month revolving period, an expected average life of 1.1 years, an expected maturity of two years and a legal final maturity of six years. UBS will act as the swap counterparty to provide the NTD/USD hedge. The notes are rated Aa3 by Moody's and AA- by Standard & Poor's.

The deal also featured an HVB-structured NT$1.2 billion ($35 million) excess spread rights offer, under which holders are entitled to receive excess spread after the senior note-holders have been paid. Yuanta Core-Pacific Securities and Taiwan International Securities Corporation underwrote the offer. Moody's and Taiwan Ratings rated the certificates at and twA.

Cash cards are a relatively new phenomenon in Taiwan but can be a tricky asset class even in markets where they are mature products, such as Japan. Cosmos Bank is just 11 years old and pioneered the introduction of Taiwanese cash cards in 1999. Today its George & Mary card dominates the market with a 40% share, four times larger than its nearest rival, with 1.2 million customers owing a total of NT$64 billion.

The difficulty with cash cards is that they are notorious for attracting problem borrowers. The George & Mary card deliberately targets customers who are left behind by other credit providers: typically, low-income earners with few savings. The cards are not difficult to obtain and offer low minimum monthly payments, just 3% for George & Mary. As a result, problem borrowers can be numerous, slow to materialize and difficult to identify. According to Standard & Poor's it can take up to 24 months for losses to appear, even in developed markets.

Structuring a securitization of cash card receiveables therefore depends heavily on the experience and track record of the originator, but with such a young industry in Taiwan there are few adequate benchmarks and limited understanding of the borrower segment as the government does not publish figures on delinquencies. Also, as a first-time issuer Cosmos is something of an unknown quantity to ABS investors.

Given all this, robust credit support is provided for and there are limits on portfolio exposures to certain types of clients, such as youngsters or people who live in the countryside.

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