First Commercial Bank has closed Taiwan's first mortgage securitization, raising hopes that a richer pipeline of deals may at last be on the way. Issued through the First Commercial Bank 2003 special purpose trust, the offer will raise a total of NT$4.28 billion ($130 million).
The deal, which is arranged by Deutsche Bank, packages together a substantial number of residential mortgages for private sale to qualified investors in three tranches of trust certificates, plus a subordinated tranche of undisclosed value picked up by the originator. All the notes offer a floating rate coupon tied to the value of local adjustable rate mortgages (ARMs).
The class-A notes will raise NT$3.91 billion, are rated twAAA by Taiwan Ratings, a Standard & Poor's joint venture, and are priced at 25 basis points over ARMs. The NT$220 million of class-B notes are rated twAA and pay 55 basis points over ARMs, while the NT$150 million of class-C notes are rated twA and come with a coupon of 65 basis points over ARMs.
There are a few mortgage deals in the pipeline in Taiwan, but selling them has proved to be a challenge. Approvals from the bureau of monetary affairs are good for one month and can be extended for a further month thereafter. Lehman Brothers' deal for Chinatrust was the first mortgage deal to win approval, in November, but failed to close within the window of opportunity. And First Commercial's deal closed on the wire at the end of the second month.
Investors in Taiwan have proven tough to win over. The product is unfamiliar, highly structured and can come with a daunting legal tenor of 30 years, though in the case of First Commercial the weighted average maturity is actually just two years.
The Chinatrust deal set out to price at a fixed rate against commercial paper but the structure was rejected by the market. By pricing against ARMs the pay-out is naturally matched to the asset pool and has proven more acceptable - it is expected to become the standard model for Taiwanese mortgage deals in future.
Given the limited investor base the pricing of this first deal looks incredibly tight, working out at roughly equivalent to 45 basis points over two-year government paper. Although there are no details being made available about who the investors are it is thought that the bulk of the paper was sold to other big state-owned banks. Bankers trying to sell mortgage deals to a wider group of investors do not believe they can realistically price at these levels even with First Commercial as a benchmark.
The next mortgage securitization in the Taiwan pipeline is Citigroup's deal for Taishin Commercial Bank, which won approval on Tuesday and is expected to close by the end of the month. Citi also has another deal up its sleeve, for Chang Hwa Comemrcial Bank.
The battle to win over Taiwanese investors to asset-backed securities is still far from won - indeed it has barely begun - but the successful completion of First Commercial is nevertheless being cheered by the industry as a significant milestone.