Singapore's Securitization Market Builds Momentum


Singapore currently offers the most favorable conditions for the development of securitization in the Asia-Pacific region. The country has a highly regarded judicial process and a transparent legal system; a well-regulated banking system; and a long history of consumer lending, which includes auto loans, credit cards, and housing loans.

A key factor pushing securitization to the forefront in Singapore is the government's wish to develop a healthy secondary local debt market. New regulations, promulgated in September 1999, permit individuals to invest their pension funds in bonds with a minimum rating of single-A. These regulations governing eligible investments for the Central Provident Fund (CPF), Singapore's pension system, could further increase interest in rated securitized bonds. The regulations increase the universe of eligible investments for CPF contributors and create a new class of investors with a natural appetite for Singapore dollar-denominated investments.

Issuer Incentives

Although Singapore banks have strong liquidity, securitization offers the possibility of improving their already robust financial ratios. Increased global competition compels Singapore banks to improve their operating efficiency as measured by return on equity, return on assets and funding costs. Similar business and funding issues face Singapore corporations.

Recent statistics indicate that Singapore's economy is recovering from negative growth. Retail sales, share indices, and property prices and purchases are all on the rise. Banks are competing fiercely on the basis of loan pricing to build up their mortgage loan portfolios, much like before the recession. Besides pricing, lenders are prepared to assume more risk, sometimes refinancing mortgage loans at 100% of the loan outstanding, regardless of the current market value.

Lower mortgage loan pricing increases pressure on banks to lower their cost of funding. On-balance-sheet debts are rated and priced in line with the rating on the bank. However, in a true securitization, the rating on the bank has no bearing on the rating on the securitized notes. Securitization benefits banks because they can effectively raise financing at the triple-A level, even though they may be rated lower than triple-A or even unrated. If the seller retains the servicing function, issuers will benefit not only by receiving fee income, but also from improved return on assets.

Availability of Information

Singapore has enjoyed very stable economic performance with steady GDP growth. Prior to the recent recession, the other downturns occurred in the 1970s and in the mid 1980s. Banks and issuers may have difficulty retrieving or reconstructing information and records from these prior periods. Without precise and reliable data covering numerous stress periods, transactions can still be rated, albeit with an added measure of conservatism. For Singapore, there are reasons why the recent data is relevant when analyzing a residential mortgage securitization:

* Recent information is more readily available;

* The recent recession has had a wide-reaching impact, as it has affected Singapore, as well as its regional trade partners;

* The swing in property values from peak to trough was more pronounced;

* Singapore's economy is more mature and growth is unlikely to resume at a double-digit pace. A weaker or slower recovery would affect demand for private housing and may affect mortgage portfolio performance

* Demographic shifts and trends demonstrate increas-

ed affluence and growth of double-income families. These shifts affect demand for private housing and may affect mortgage portfolio performance.

Several major banks have indicated that Singapore's mortgage portfolios, particularly those for owner-occupied properties, have generally performed well throughout the recession. This is partly because of the importance of home ownership in Asian cultures, which Standard & Poor's has also noted in Japan and Hong Kong.

However, in Singapore, information on industry-wide portfolio performance, such as write-offs or arrears for residential mortgages, auto loans, or credit cards incurred by all financial institutions or all non-banks, is not publicly available. The availability of this information would help refine the rating criteria and establish a transparent and measurable benchmark. Such a benchmark can allow a potential issuer more adept at risk control and management to benefit from lower credit support in a rated transaction.

To date, there have not been any rated, true securitizations involving Singapore assets. Four unrated transactions have been completed, all of which are denominated in Singapore dollars. These structured notes are backed by commercial real estate, but are ultimately guaranteed by or have recourse to the sponsor or owner of the real estate. Therefore, the rating on such issues could not be higher than the rating on the sponsor or guarantor. The successful placement of and oversubscription for these pioneering transactions is a good indication that local investors are keen to invest in Singapore dollar-denominated structured bonds.

[For further information, please see S&P's MBS criteria for Singapore, on www.standardandpoors.com/ratings.]