First Taiwanese securitization moves closer

Industrial Bank of Taiwan and SG sign agreement on proposed collateralized loan obligation.

While the final touches are still being put to the regulatory framework for asset backed securitization (ABS) in Taiwan, the two banks at the forefront of efforts to promote the ABS market are moving ahead with what will probably be the first deal to be done in the country.

The Industrial Bank of Taiwan (IBT) and SG last September signed a cooperation agreement to jointly develop the securitization market in Taiwan. At the time the agreement was announced, an IBT official told FinanceAsia that it was talking with SG about a possible collateralized loan obligation (CLO) backed by IBT originated receivables.

Four months on and IBT has confirmed that SG will arrange the CLO, although the exact timing of it is dependent on the Legislative Yuan's approval of the securitization law.

Preliminary approval for the law was given last week, leaving the Ministry of Finance to finalize and implement the rules of enforcement. That should be completed within the next two months, but it is likely that SG will advance fairly cautiously in getting the deal done, given the extra time needed to structure the first ever ABS deal and to market it to investors unfamiliar with the product.

Nonetheless, Kenneth Lo, president of IBT, has disclosed that the debut issue will seek to raise between NT$3 billion ($85.5 billion) and NT$4 billion and should be ready for placement within six months.

A lot of work remains before that point is reached however. Both parties will need to select a custodian bank and work with potential rating agencies. According to Lo, the underlying portfolio will be made up of high quality loans from local corporates and IBT expects to get a single-A rating from Standard & Poor's.

Selecting an international rating agency would also seem to be logical as it would enhance the appeal of the issue to foreign investors keen to get their hands on higher yielding Asian credits. Nevertheless, it is more likely that local insurance companies, bond funds and other institutional investors will be targeted for IBT's first offering.

In addition to the CLO, IBT is also contemplating the securitization of corporate account receivables. According to IBT, when it first looked into doing ABS, the bank came across corporations interested in creating land assets through securitization. Commercial property securitizations have become a popular tool amongst European corporates looking to realize capital from non-core assets.

This trend is likely to spread to Asia in the coming year: Japan has already seen a number of them, but a revision of the securitization law will be needed in Taiwan before these kind of deals can be executed.

At the moment, the law only takes into account securitization of financial assets and not physical assets such as properties, although the Finance Ministry is thought to be reconsidering the rules to allow this.