According to rumours doing the rounds among Asian ABS bankers, HSBC will soon launch Asia's first ever securitization backed by taxi and public light bus loan receivables. FinanceAsia has heard from numerous sources that the bank will self-manage a HK$3 billion ($384.7 million) five-year deal that is likely to close within the next month.
It is understood that the deal was originally set for launch in February or March but got delayed due to the outbreak of SARS.
Aside from being the first of its type in terms of assets, the deal is also rumoured to be a synthetic issue - meaning that only the credit risk of the assets is transferred, while the assets themselves remain on balance sheet. That fact alone makes it a rarity for the Asian market.
To date only two public synthetic balance sheet deals have been completed in the region: ABN Amro's HK$1.1 billion mortgage-backed offering in December 2000 and DBS' S$224 million ($128.7 million) collateralised loan obligation via JPMorgan in December 2001.
As was the case with those deals, HSBC's motivation in doing a synthetic deal is to reduce the risk capital it needs to hold against the reference loan portfolio and in the process improve the return on its capital.
Under Hong Kong's regulatory regime, banks must hold 100% of capital against all non-mortgage assets (they have to hold 50% capital against mortgages). Although the exact extent of how much capital relief HSBC will get through this transaction is not known, ABS bankers believe the deal should allow the bank to hold significantly less than 50% of assets against the portfolio, which is thought to be worth more than HK$3.5 billion.
Rumours suggest that both Standard & Poor's and Moody's will rate the deal, which is likely to feature a sizeable unfunded triple-A tranche and a few lower rated funded subordinated tranches.
Given that the transaction will be denominated in Hong Kong dollars, it seems likely that HSBC will target large Hong Kong institutional investors and local branches of foreign banks looking for good yielding highly-rated paper.
It will be interesting to see whether other Asian banks follow HSBC's lead in the coming months in issuing a balance sheet deal. The main reason given for such transactions not taking off in the region has been that many financial institutions are so cash rich that improving capital adequacy ratios has not been deemed as important as it has in the United States and Europe.
However, there seems to be growing awareness among more enlightened banks of the need to improve their return on capital. The rating agencies would be especially pleased if this market did pick up, having long extolled the virtues of balance sheet deals.
"We will start to see more balance sheet deals once the entire bank is being managed on a capital basis - reducing capital, optimizing capital," said Diane Lam, director of Asia Pacific structured finance ratings at S&P, in an article on CDOs that appeared in the July issue of FinanceAsia magazine. "We are trying to get that message out there for a number of reasons: portfolio management and capital management. There is much more the banks can do as far as capital management goes. If you can run your business on less capital, you have more flexibility to potentially run a new business or line of business.
"It has not happened so far in Asia but what is happening is that banks are becoming more exposed to synthetic deals," adds Lam. "The treasury departments at banks have become exposed to [arbitrage] CDOs as investors, so it is not going to take that long for them to make the jump from investors to actually doing balance sheet deals for strategic reasons."