HKMC mandates Merrill Lynch for MBS deal

Government housing agency looks to kick start mortgage-backed securitization market in the SAR.

The Hong Kong Mortgage Corp. (HKMC), the government agency set up in 1997 to promote home ownership and develop a secondary mortgage market, has mandated Merrill Lynch to arrange a multi-currency mortgage-backed securitization (MBS) programme.

The first offering from the program will be a Hong-Kong dollar denominated issue and is expected to launch early next year. A well-placed source told FinanceAsia that the deal would look to raise between HK$1.5 billion ($192.3 million) and HK$2 billion.

In what is a highly competitive market for mandates - due to the relatively small number of international securitization deals from Asia - this is a considerable fillip for Merrill Lynch.

The bank has been largely quiet in the Asian ABS market since February 1999 when it launched a $572 million commercial MBS of Hong Kong office and retail buildings for Wharf Holdings.

Called Harbour City Funding, the deal was split into nine tranches: Six denominated in Hong Kong dollars and three US dollar tranches. The senior $230 million piece, rated triple-A by Fitch, priced at 125 basis points through three-month Libor.

Understandably, the bank is pleased to be making a return to the market. "Any mandate is a good mandate," comments a senior banker at Merrill. "This is also fairly significant because it's the first multi-currency deal. This will allow HKMC to do a series of deals in Hong Kong dollars, US dollars - it can choose depending on market conditions."

Rumours suggest it is highly likely that a master trust structure will be employed on the programme. This increases flexibility because it allows HKMC to add receivables to the trust on an ongoing basis, from which more deals can be issued.

Repeat deals from the same vehicle will help the issuer save costs, which should be attractive to the HKMC, especially if it is to meet one of its primary goals - facilitating the development of the MBS market in Hong Kong.

Although the HKMC is no stranger to the MBS market, completed two deals for American Express Bank and one for Dao Heng Bank for a total of HK$2.23 billion in late 1999, the latest offering is a very different proposition entirely.

The previous deals were not designed to be sold publicly to investors, but to benefit the banks in managing their balance sheets by using a back-to-back structure.

Firstly, the HKMC bought a portfolio of loans from the banks, and then sold them on to the special purpose vehicle (SPV). The SPV then issued the mortgage-backed paper back to the bank complete with a HKMC guarantee for timely payment of principal and interest from the underlying pool.

The guaranteed notes carry a 20% risk weighting for capital adequacy treatment, significantly lower than the 50% risk weighting if the loans were held on balance sheet. The notes also qualify as liquefiable assets.

The new programme, however, is designed to be sold publicly and diversify the investment opportunities available to investors. "This is very different to the back-to-back deals," explains Philip Li, senior vice-president of finance at HKMC. "The trading of these deals is limited but this new deal will increase liquidity, boost the secondary market and broaden the investor base."

The HKMC certainly has certainly generated enough assets to kick-start the MBS market in Hong Kong having acquired over $13 billion of mortgage loans from banks already in 2001.

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