Courts Asia has launched a multi-jurisdiction, multi-currency and multi-seller securitisation programme that could jumpstart the nascent Asia asset securitisation market and set a benchmark for others to tap cheaper funding sources.
The retailer’s three-year programme is split into two tranches via subsidiaries Courts Malaysia and Courts Singapore: a M$430 million ($133 million) trance and a S$150 million ($121 million) tranche, according to a source.
The total financing amount will vary month-to-month based on a pre-agreed funding rate, which is undisclosed as it is a private placement deal. For example, if Courts’ business grows resulting in the increase in its receivables’ pool, its funding size will also expand.
The structure is designed to provide Courts with flexibility in its asset origination activities while minimising negative carry – excess trapping of reserves – and maximising the revolving period – which is a phase when any principal repaid is used to buy more receivables, says a source close to the deal.
“It’s a secured product so the pricing will be much more competitive versus an unsecured bond,” said the source. “It can be an additional liquidity source, alongside its other capital market instruments.”
Asset securitisation is a method used by companies to increase their overall liquidity and generates immediate proceeds by securitising illiquid assets into liquid assets that are then sold to investors. The value and cash flows of the new security are based off the underlying value and cash flows of the assets used.
Installment loan receivables are used as assets for Courts’ programme and special purpose vehicles (SPVs) – Vista Lavender for the ringgit tranche and Assetrust for the Singapore dollar – have been set up to manage the performance of collateral pledged, adds the source.
SPVs are created in asset securitisations to isolate certain company assets or operations. In the case of Courts, the subsidiaries have sold a pool of installment loan receivables to these vehicles to risk manage using specific hedging strategies.
For example, reserve accounts are established to mitigate liquidity shortfalls in the portfolio. Also, the vehicles can use callable interest rate swaps or caps to hedge interest rate risk, highlights the source. These are reasons why securitisation issues are rated much higher than if a corporate were to issue on a standalone unsecured basis.
Inspections on the assets transferred are carried out on a monthly basis. If the assets breach the minimum portfolio performance trigger, Courts is at risk of an early amortisation event once the revolving period of the instrument ceases.
“It’s a very good risk management tool for investors because they can get out of the deal very quickly,” said the source.
Despite the scarcity and unfamiliarity of the market towards such products, bankers expect Asia’s asset securitisation market to grow over the next few years.
“Issuers are really adopting this form of funding, especially those located in multiple jurisdictions, and have multiple-entities,” said a banker. “Asset securitisation is perfect for those looking to establish a nimble funding strategy where they can tap different markets.”
Asia ex-Japan local currency asset-backed securities volume stands at $20.6 billion with 86 deals year-to-date, on par as last year’s $21 billion with 81 deals for the same period, according to Dealogic data. However, this is a significant jump from 2011’s $10 billion volume with 56 deals.
HSBC is the sole structuring advisor, lead arranger and hedging counterparty for Courts’ asset securitisation programme.