Domestic ABS Takes Off in Asia -- Well, Kind of


Not long ago, asset-backed securitization was expected to play a major role in Asia's recovery by helping domestic issuers tap overseas funding for recapitalization and restructuring. But outside Japan, Australia and Hong Kong, highly liquid domestic markets, a dwindling number of potential issuers, and foreign investors still wary of Asian risk have dimmed the prospects for global ABS issuance from the region.

Still, market players throughout Asia are eager to use securitization, and have applied many of the same techniques used in securitization to structure transactions. The result has been a rise in quasi-ABS deals in South Korea and Singapore, in particular usually involving a well-known domestic originator, local currency-denominated assets, and placement into the domestic market.

Though often called securitizations by the arrangers and the local media, they do not meet the standards of international asset-backed deals. Rather, these transactions represent an in-between stage between ordinary debt financing and true securitization.

"Singapore and Korea are developing securitization domestically, in a way that fits their legal, tax, and investor requirements so that they can get execution without doing a full-blown international- standard securitization," commented Christopher Chau, director of international structured finance at Fitch IBCA in Hong Kong. "The recent CMBS issues from Singapore are really structured notes, but that doesn't matter because it somehow gets them balance sheet management that they want at the cost of funding that they want. What we're seeing now in both places is the first step in the development of the market."

Singapore: Issuing Structured Notes, not CMBS

Starting last December, Singaporean property developer DBS Land has issued in quick succession three transactions backed by commercial property, in what it says are the first asset-backed deals from Singapore. Each transaction has a similar structure: DBS Land sold one of its buildings to a special purpose vehicle, which issued junior and senior bonds to fund the purchase and had the option to put the building back to DBS Land at the end of maturity. All of the transactions were Singapore dollar-denominated, unrated, and placed in the domestic market.

But despite the branding effort, these transactions are not true securitizations, sources said. "The put-back option means that the SPV can sell the building back to DBS Land after ten years at a pre-guaranteed price. In other parts of the world, that wouldn't be considered a true sale for accounting purposes," pointed out one banker in Singapore.

Guaranteeing principal and other payments to investors ties the credit risk in the transaction back to the seller, meaning that none of the deals could have achieved a rating higher than DBS Land, pointed out an analyst in Hong Kong. "In real CMBS deals you stress the cashflows, pay attention to the debt service coverage ratio, and quantify the loan-to-value. Probably not much detailed analysis was done on the cashflows here, because this is a highly regarded local player."

Bankruptcy remoteness a key element in securitization has been questioned in another property-backed transaction. That transaction was originated by Pidemco Land, which said it raised S$100 million ($59 million) through Singapore's first securitization backed by the sale proceeds of apartments.

In most securitizations, the special purpose corporation that issues the securities is owned by a third party or charitable trust, to ensure that the securitized assets are not included in the bankruptcy estate of the seller. Since Pidemco's securities were issued by a wholly-owned SPC, it raises the issue of whether the transaction is bankruptcy remote, agreed sources. "It is possible to have a wholly-owned SPC if you get a non-consolidation opinion from a lawyer. But in Pidemco's case, the fact that the SPC is wholly-owned is another reason why this wouldn't be considered a true CMBS," commented one analyst.

Pidemco may not have felt the need to set up a bankruptcy remote SPC because it is owned by the Singaporean government, pointed out another banker. Still, "one of the tenets of securitization is bankruptcy remoteness, and at the end of the day the bankruptcy remoteness of this is questionable," he added.

Despite the missing pieces, Singapore still has great potential for issuing ABS globally. "The transactions from Singapore are structured in a way that tries to reduce some of the risk by giving collateral, but have not reached the level of a pure CMBS such as what has been done in Japan and Hong Kong," commented Diane Lam, director of structured finance ratings at Standard & Poor's in Hong Kong. "The assets and legal framework are there, and the concept is well-known, but issuers don't need much money at the moment."

South Korea: Looks Like Corporate Bonds