ABS Pros are Bullish On Japan


Despite a disappointingly small number of cross-border securitizations from Asia (excluding Japan) this year, the long-term future of ABS is still bright, said panelists at the Fabozzi/IMN conference on Asian securitization in Hong Kong last week.

The lack of liquid swap markets for regional currencies, high levels of domestic liquidity, and the limited risk appetite of monolines and investors continue to inhibit potential issuers, asset backed pros said. And even future flow transactions are unlikely to boom in the near future, agreed ratings analysts.

For 2000, Moody's Investors Service predicts that Asian ABS issuance will be around $2 billion, roughly the same as its estimate for 1999, said Frederic Drevon, the agency's Hong Kong-based managing director of structured finance. However, that number does not include volume from unrated quasi-securitizations issued in Singapore and South Korea, he added.

In fact, domestic securitization markets will continue to develop at the expense of cross-border deals next year, predicted bankers. Not only does domestic issuance do away with the need for a swap, but local investors are highly liquid and eager for investment opportunities. "Name recognition is stronger within the domestic market, not overseas, [though] domestic issuance is capped by a desire for strong issuers. This is the case in Korea, Thailand and Singapore," said Gary Watmore, group vice president at ABN Amro.

This was particularly so for Korea, which saw at least a dozen domestic transactions come to market this year. Over time, Korea will continue following the U.S. model and become the third largest securitization market in the Asia-Pacific region behind Australia and Japan, predicted Paul Burke, head of global securitized finance at Chase Manhattan Asia.

Looking ahead, there are some bright spots on the horizon. "Outside Japan, China has the most significant potential for securitization in the long run, for both domestic and foreign issuance," commented Paul Kruger, partner at Clifford Chance. "The regulators are very positive about it, and for a select group of companies it is a very good financing tool."

In addition, some finance companies in Thailand have performing asset pools which could be securitized, said Richard Holzinger, managing director of Financial Security Assurance. "One lesson learned in Asia this year was the necessity of having a guaranteed bonus," he joked.

But Things Look (Quite) Good In Japan

On the other hand, bonuses are unlikely to be a problem for those structured finance pros based in Tokyo, as Japan's asset-backed market was the star performer in Asia this year. However, significant problems that will inhibit the market still remain, conference delegates agreed.

Moody's expects to rate about 100 domestic and cross-border deals in Japan before year-end, said Drevon, but the range of ABS issuers remains limited. "While securitization has been very successful for leasing companies, it has not been very successful among banks. There has been a decrease of origination in the banking sector," he said.

The reluctance of banks to originate is one reason why mortgage-backed securitization failed to take off this year, after Sanwa Bank issued the first MBS deal this spring.

After the government injected public money into the banking sector and began forcing banks to merge, issuing MBS no longer was a priority for them, said Robert Sheehy, head of global securitization for Bear, Stearns & Co., which arranged the Sanwa deal. "For MBS to take off, you need a series of transactions. Now the main challenge is to find that second and third transaction," he said.

And while commercial mortgage deals are taking off, most of them are private or placed with a single investor, said Thomas Eastling, senior vice president of Duff & Phelps Credit Rating Co. in Tokyo. "What would be better for the development of the market is more public issues with multiple ratings. The growth [of CMBS] is starting to outpace the level of understanding," he commented. Lack of agreement among appraisers and a the absence of a standard valuation method for real estate are further obstacles, added Drevon.

Going forward, new asset classes likely to appear next year include distressed debt, leveraged aircraft leases and credit card receivables. MBS issuance should get a further boost once the national mortgage institution, the Government Housing Loan Corp., begins securitizing next year.

But ultimately, bank participation is necessary to drive the market forward. "At the end of the day, the government gave the banks money. And if it injects money again next year, the whole process will get delayed again," Sheehy said.