Fitch sees renewed growth in Asian RMBS

Expect RMBS to overtake consumer ABS as the dominant cross border issuance in Asia.
Issuance volumes for cross-border structured finance products in the Asia-Pacific region will likely remain flat this year, predicts Fitch Ratings. But the asset classes of transactions contributing to issuance volumes are expected to change measurably.

Fitch says that that the primary shift in issuance type will come from Korea where the agency anticipates a decline in traditional asset-backed securities (ABS) issuance and a re-emergence of the residential mortgage-backed securities (RMBS) product.

"Fitch anticipates a shift in the volume of cross-border issuance in Korea away from the three primary ABS issuers, Samsung Card, LG Card, and Hyundai Capital towards RMBS," says Wit Solberg, senior director and head of Fitch's non-Japan Asia structured finance team. Solberg added that real estate funds seeking Korea domiciled assets are expected to access the commercial mortgage-backed securities (CMBS) market in 2006, however, transaction sizes are expected to be small.

As for the pace of Asia-Pacific CMBS issuances, Fitch expects it to slow down this year compared to 2005, with average deal sizes slightly smaller. It sees a shift in the CMBS landscape in terms of collateral location and leverage, in large part, because of regulatory changes affecting both Singapore- and Hong Kong-based REITs.

"The dynamics of the new issuance are also likely to change due to MAS approved increase in leverage parameters for Singapore real estate investment trusts (REITs) to 60%," says Solberg.

As a result, Singapore REITs will contribute less issuance volume and those that source CMBS as financing, will do so at increased leverage. "CMBS issuance by Singapore REITs will also likely come from collateral domiciled in new markets such as China, Korea, Malaysia and others," says Solberg who added that he expects there will be at least one CMBS transaction backed by China domiciled collateral before the end of 2006.

Meanwhile, prospective Hong Kong REITs have already begun exploring CMBS alternatives. However, Fitch thinks that the loan market may be more attractive for those REITs versus their Singapore counterparts, due to a wide disparity between the market value of the properties and their underlying cash flows to support debt service.

"While market participants once speculated that the Link REIT would source 100% of its debt financing through CMBS, it is now anticipated that it will tap both CMBS and unsecured loan markets due to the liquidity in the latter," says Solberg. Fitch anticipates that other Hong Kong-based REITs are more likely to source CMBS financing for assets owned outside the SAR, including China.

Finally in Taiwan, Fitch expects a slow start to the year, with issuance to be relatively dormant for the first part of the year, but likely to re-emerge again in the Q406. "Credit card assets have been popular in 2005 but since Q405 have been sidelined due to deterioration in credit performance that sent jitters through the market," says Hilary Tan, director, in Fitch's structured finance team.

"Fitch does not believe this is a systemic problem and believes that such market correction was expected due to the overheating of competition in the credit markets which came at the expense of underwriting quality."

Furthermore, after successful completion of the two pilot transactions in 2005, Fitch believes that China's legal framework now has a preliminary foundation for securitisation in the country, even though practical obstacles remain.
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