Securitization back on the agenda in Taiwan

No securitization deal has ever been launched in Taiwan. There are signs that the government wants this to change.

After a few years of relative non-activity in Asian securitization, with the notable exceptions of Japan and Korea, things may be starting to look up again. Investment banks, such as ING Barings, are starting to build up their asset backed securities (ABS) teams again in the belief that potential issuers are looking at this funding method once again.

Taiwan is one country that wants to get in on the act. The government, which recently had six bills from its financial reform package passed by the Legislative Juan, has also been working towards a draft securitization law. This was due to be made public at the end of June, but has been pushed back as the government is focusing on other concerns, namely rising unemployment, diplomatic tensions with China and an impending election later this year.

However, one Taipei-based lawyer who focuses specifically on the capital markets, says he expects that some announcement on ABS issues will be made in the next couple of months. "As I understand it, the government is still working on the draft, but the timetable has been pushed back because of other matters," he says. "It is though facing pressures from certain quarters to push this through and I expect it to be one of the issues discussed when the Financial Supervisory Commission meets on September 18."

The government has been inviting the opinions of overseas securitization experts on how to get the ball rolling, and it is believed SG has been appointed in some formal capacity to work with the Central Bank and the legislators.

One Hong Kong banker who was approached by Taiwan's Central Bank confirms the government is serious about developing ABS, but also said it was a little nanve about the benefits at this time.

"The government has been having active discussions with all parties and is certainly pushing strongly to get this law in place in the next month or two," he says. "It is far too early to say if the market can develop, and I have to say that the expectations of the Central Bank may be a little bit high. It believes that securitization alone can cure the country's non-performing loans (NPL) problem, that by selling NPL-backed paper they can pass the burden to investors. Obviously it does not work like that in reality. It will still need to service the bad loans effectively, and investors will need between 60% and 70% discount in order to get liquidity."

In an attempt to address the NPL problem -- which currently account for around 12% of all loans -- Taiwan has been looking to establish asset management companies, such as the Korean Asset Management Corporation (Kamco).

Securitization has formed a major part of Kamco's strategy in disposing of non-performing loans from financial institutions, which it was mandated to do by the government in the wake of the 1997 financial crisis.

To date, it has raised around $2.9 billion through this method, most notably last year with its $367 million cross border deal, lead managed by Deutsche Bank and UBS Warburg, which won FinanceAsia's asset-backed deal of the year.

However, the success of Kamco with its securitization deals has largely been a result of the company's excellent record in servicing portfolios of bad loans. Securitization does not make these disappear as if by magic, but it does act as an incentive for the issuer to improve its quality of servicing (the real means to rehabilitate bad loans) to ensure transactions perform up to or better than investor's expectations, making it easier to issue in future.

As long as the powers that be in Taiwan appreciate that fact, they will find securitization to be a very useful source of funding in the years to come, as will originators of performing assets.

Singapore, hardly renowned as a hotbed for ABS activity, is another country that has recently embraced securitization with two significant deals in the last couple of months. Property group Raffles Holdings launched a massive S$984.5 million ($539.6 million) deal in June via DBS Bank. The transaction, issued out of the Tincel special purpose vehicle, is backed by the cash flows from a 55% stake in the Raffles City Complex and offered two 10-year tranches: S$689 million of senior notes and S$295.5 million of subordinated paper.

Another property deal quickly followed, this time through a S$200 million issue from CapitaLand Residential that was backed by cash flows in three, as yet incomplete, apartment blocks. The CapitaLand transaction, lead managed by HypoVereinsbank, set a precedent by being the first Singapore deal to be rated by an international rating agency, in this case Fitch IBCA. The S$160 million senior notes, rated triple-A, priced at 3.71%, 32 basis points over six-year swaps.


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