The legal opinion on Asian securitization

Neil Campbell, partner with Sidley Austin Brown and Wood, tells FinanceAsia about legal developments in the ABS market.

Sidley Austin Brown & Wood, one of Asia's leading law firms, has been involved with some of the most important asset-backed securitizations in the region, including the $250 million whole-business securitization for Malaysia's 1st Silicon arranged by Nomura and awarded Best Securitization Deal in this year's FinanceAsia achievement awards. Neil Campbell, a partner at the firm, discusses SAB&W's securitization practice and the ever-changing legal landscape for the Asian ABS market.

What are the most important Asian securitizations that SAB&W has worked on?

For me personally, the Asiana air tickets receivables deal (lead managed by Chase), which was the first future flow deal out of Korea, and the 1st Silicon deal from Malaysia, which was AsiaÆs first ever whole business securitization. We were also involved with both COSCO (China Ocean Shipping Company) deals, which were two of the few securitizations to come out of the People's Republic of China.

We've also been involved in lots of other deals, such as the Samsung deal for Citibank ($302 million offering in late 2001). However, both Asiana and 1st Silicon deals were particularly innovative.

Where do you see potential for growth in the market?

This year, I think, regardless of the number of deals weÆre involved with, around half of them will be in Korea as there is a lot of business there. On the securitization front generally in Asia (ex. Japan) in Hong Kong there are three main law firms (Sidley Austin Brown & Wood, Clifford Chance and Freshfields) but the number of banks coming in is still increasing, with the likes of BNP Paribas and Standard Chartered expanding their businesses, which is good news for us.

What distinguishes you from the competition?

A lot of it is down to personality. There are people who prefer to use us and not our competitors and vice-versa. Another aspect of course is what deals you have been involved with. For example, if someone were to do another whole-business securitization in Asia, it would be pretty odd not to call us because we've done the only one.

ItÆs the same with particular issuer clients like Samsung Capital. We enjoy a good relationship with them and would hope to be involved with them again when they do other transactions in the future.

Finally, to be honest with you, a lot of it also comes down to price and who happens to be the cheapest on the day. In a lot of countries in Asia, which is true of most places these days, this is a fairly significant factor.

Some countries, like Hong Kong have common law jurisdictions while others like Taiwan and China are civil law jurisdictions. What are the challenges of doing deals in those countries?

What has been needed in most civil law countries is specific legislation to facilitate securitization. If you look at the European experience, England did not need to introduce specific securitization legislation while other countries like Italy did. The same is true out here. The Philippines has legislation; so does Taiwan (or it soon will have), Korea, Thailand and Indonesia. By contrast Hong Kong required no legislative changes for securitization to take place.

The need for legislation can hold back the business from a legal point of view because in a lot of countries certain legal issues can only be resolved through legislation e.g. certain issues such as true sale and withholding tax (which is a big problem for offshore deals).

Trying to describe a securitization transaction and then having to go through with the local counsel the legal issues that you need to be satisfied with can also be complex. In a lot of cases they havenÆt really analyzed the issues to the level that we need to. For example, to achieve a true sale, you need to ensure that there are no grounds on which the sale can be challenged. This requires extensive research on the bankruptcy laws and so on.

A lot of Asian countries donÆt have case law or even legislation that guides the lawyers to the answers. Therefore, particularly when tackling the first deals, the local lawyers issue a good legal opinion - but thatÆs all it really is - an opinion. But it can be difficult for the local lawyers because there may be little or no precedent. One of the reasons the first deals can take so long is because a huge amount of time is put into the legal analysis. In our 1st Silicon deal, for example, we had to prepare a very lengthy legal issues paper for the rating agencies.

The past year has seen some fairly significant developments. The Philippines has issued a law, Malaysia has issued its guidelines and Taiwan is close to passing its own law. What has been your take on this?

Some of this is clearly driven by the need to make legislative changes to enable securitization to happen, which is encouraging. In some countries there is also the desire to regulate the development of securitization, which is understandable but should not hold up the development of the market.

How important is government support to developing the markets? President Arroyo, for example, mentioned securitization frequently as an important economic tool for the Philippines.

It is very important. It is the same issue in the PRC where Sidley Austin Brown & Wood has some very good connections, such as acting for the Ministry of Finance. PRC officials are generally all very keen on securitization. In more regulated countries, if something has the support of senior officials, then it is much more likely to be approved.

Being able to point to comments from the President saying that securitization is a good thing is very helpful in obtaining any approvals. When politicians, officials, the central bank and regulators start saying that securitization is something to be encouraged, this is very beneficial. Without it, and particularly in countries where you need legislation, it would very difficult to get the business going and the right legal model in place.

You mention China, where not much has really happened as yet. What scope is there for issuance from the PRC?

In theory it is huge. The problem is that there are not many companies like COSCO, with huge US$ flows. Most company's revenues are in RMB. We certainly see huge opportunities but there will also need to be legislative changes. We have been talking with a number of the asset management companies in general about disposal of NPLs, and people have talked about securitizing them. This has led to people discussing the possibilities of securitizing onshore in the PRC. There is a new Trust Law, which the lawyers are working through to see how it could help.

Long-term, given the size of the economy of the PRC and with it opening up as part of joining the World Trade Organization, it could be a very significant market for securitization and structured finance generally. Right now though, the opportunities are fairly limited. To do any kind of cross border deal, there will have to be another company with significant offshore receivables and that is not likely to happen in the near future.

Lawyers donÆt often get much publicity when it comes to discussing deals. Do you ever feel like the unsung heroes of the securitization business?

Not really. If I really wanted to stand up in front of a room full of people, I would be an investment banker! Our clients do recognize and appreciate what we do and also know that getting a deal closed is a true team effort. We are fortunate to have as our clients some of the best people in the business.

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