Industrial Bank of Taiwan teams up with SG to push ABS

Taiwan has yet to use securitization. An agreement between the Industrial Bank of Taiwan and SG seeks to change that.

The Industrial Bank of Taiwan (IBT), formed in 1999 to support strategic business sectors and accelerate corporate restructuring through the provision of medium and long-term financing, has signed an agreement with SG Asia to get the asset-backed securitization (ABS) market moving in the Island Republic.

The two parties are also in discussions about a possible collateralized loan obligation (CLO) deal, using receivables from IBT's loan portfolio. In a CLO deal, the cash flows that go to the special purpose vehicle (SPV) are divided into different tranches, with each one having different payback periods and levels of seniority according to investor demand.

An IBT official explains, "We've just signed a cooperation agreement with SG Asia to jointly develop the securitization market in Taiwan. It's also possible that we may sign a contract with them for a CLO transaction. That's still being evaluated."

If any deal were to take place, from IBT or any other entity, it would be the first securitization ever to come out of Taiwan.

The development of an ABS market in Taiwan has traditionally been hindered by the lack of a legal framework. There are also uncertainties whether the transfer of assets to SPVs would be subject to the 0.1% transaction tax levied on corporate bonds, or income tax, business tax and deed tax.

Tax breaks are considered to be one of the major advantages underpinning securitization and SG and other interested parties will, therefore, have their work cut out if they are to convince the Ministry of Finance (MoF) to make such allowances.

"If the ministry wants to smooth the path towards securitization, there are quite a lot of things which need to be addressed, including the unfriendly tax issues," one observer recently admitted. "The authorities seem to want to develop the market, but this will be a good test of how willing they are to cooperate."

That willingness has to be open to question, following a critical amendment made to the Central Bank of Taiwan's draft securitization law, currently being considered by the Legislative Yuan.

The original draft law set out guidelines allowing for two different types of securitization vehicle in line with international standards: special purpose companies (SPC) incorporated under the Company Law and special purpose trusts (SPT) to be created under the Trust Enterprise Law.

At the last minute, however, the MoF decided that only SPTs, less commonly used than SPCs, would be able to securitize assets. An SPT issues trust certificates, not bonds like an SPC, and it remains uncertain whether these can be traded in the secondary market.

According to some reports, the MoF thought that allowing both require too many changes to the country's financial legislation, although an amendement allowing for SPCs could be introduced at a later date.

At the moment it is still too early to tell if an ABS market will emerge, but the hiring of a foreign bank, as well as legal experts, with the necessary experience is a positive step in what could prove to be a lengthy process.