When is a Reat not a Reit

Taipei''s IBM building becomes first to be securitized under Taiwan''s real estate securitization law.

Tong Yang Chia Hsin International is ready to close an NT$2.1 billion ($625 million) securitization of the IBM Building in Taipei. This will be the first deal to rely on Taiwan's real estate securitization law, enacted in July 2003, and is described locally as a real estate asset trust (Reat) securitization, which is not to be confused with a real estate investment trust, or Reit.

In effect, the deal is a commercial mortgage-backed securitization, though in fact it is not actually backed by a mortgage - in Taiwan the trust structure provides a stronger framework than would be possible under a typical mortgage-backed structure. However, the ends and the means are more or less the same.

Investors are being offered notes, backed by the value of the building and the cash flows it generates, that will be issued in two tranches through a trust. The first tranche, rated AAA by Moody's Taiwanese venture, will raise NT$1.63 billion and offers a fixed-rate coupon of 2.3%. The second tranche, rated A, raises NT$500 million with a coupon of 2.6%.

Both tranches have a final legal maturity date in December 2012 and an expected maturity date in June 2011. There are no direct pricing comparisons as this is the first deal of its kind, but according to bankers involved on the deal Chia Hsin has achieved its goal of locking in fixed-rate funding at more attractive rates than can be achieved in the local loan market, which is anyway dominated by floating-rate funds.

But the deal is not simply about getting cheap cash and diversifying funding sources. "The client would also like to support the government in developing this new product," says an adviser to the deal. "And as the first deal of its kind it helps the client's corporate image."

The asset itself, the IBM Building, is an office tower in Taipei's central business district. Chia Hsin has managed the property since shortly after its completion in 1986 and will continue to manage the property in the future - Chia Hsin does not actually own the entire building; a few floors are separately owned and which are not included in the transaction.

The majority of the tenants are financial companies or institutions and the concentration of risk into this industry sector is mitigated through the establishment of a reserve fund mechanism. SG is the arranger on the transaction with Industrial Bank of Taiwan as joint arranger. The deal, which was mandated in September 2003, is expected to close on June 10.