After taking a beating from the collapse of the US subprime market and the demise of European investors, Asia’s structured finance market is showing signs of life. A clutch of deals in 2011 have raised spirits, but there is much still to do.
Source: Reuters/David Gray
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The Asian securitisation market is on the road to recovery, but it remains a lumpy, fragmented collection of asset classes in different jurisdictions, with issuers mostly content to avoid the extra complications of putting out deals in a cross-border format.
“Apart from Japan and Australia, the cross-border market is actually quite small, most of it in Korea, where we have had constant deal flow [in the last decade],” says Jerome Cheng, senior credit officer, structured finance, at Moody’s in Hong Kong.
“Korean issuance had dropped to about US$2bn in 2009. That started rising to US$3bn and US$4bn, respectively, over the next two years, although I doubt it will grow any further in 2012,” he said.
“Cross-border securitisation is still a competitive funding option for Korean issuers, who need to refinance their maturing ABS in 2012,” said Stan Ho, head of non-Japan Asia structured finance at Fitch Ratings in Hong Kong. “2011 represented an active year for non-Japan Asia cross-border securitisation, which continued to be dominated by Korean credit card and auto loan ABS.”
One of the highest-profile deals came in November when Korean Air Lines closed a US$300m three-year secured floating-rate note, the first securitisation of passenger ticket sales on its North American routes, allowing the carrier to align better its funding with its cost and revenue structure.
“Given Korean Air’s leading position in the trans-Pacific routes and robust transaction structure, we were able to achieve very competitive pricing – a floating-rate coupon of 200bp over one-month Libor – despite the continuing market turmoil,” said Warren Lee, global head of structured financing solutions at Standard Chartered Bank, the sole arranger and lead manager.
A month earlier, the same bank had been busy closing another deal – a US$300m cross-border securitisation of auto loan receivables originated by Hyundai Capital Services. In 2011, StanChart also included Asian assets in its own Sealane II, the first public trade finance synthetic CLO since 2007, and completed its seventh public corporate loan securitisation under the Start CLO programme.
Singapore also returned to the structured finance arena in 2011 with a US$645m CMBS transaction in July. The successful refinancing of the Raffles City complex, which helped Silver Oak to the largest CMBS transaction in Asia in recent years, built on the typical CMBS structure for Singapore REITs, where secured funding from the bond and loan capital markets is on-lent to RCS Trust, an unlisted property holding company 60% under the control of the CapitaLand group.
“It is the first-of-its-kind transaction structure that incorporates rated CMBS bond, loan and liquidity facility exposures as part of the same overall transaction structure,” said Stephen Williams, head of global capital markets for Asia Pacific at HSBC. “In light of capital requirements for banks, this has been introduced to achieve attractive risk capital treatment for investors and banks taking exposures in the transaction, leading to maximum return on risk-weighted assets.”
Such measures have helped broaden the investor base for Asian structured finance.
“While the European ABCP conduit banks were still active in investing in non-Japan Asia securitisation, Japanese banks became an emerging investor base for non-Japan Asia securitisation and participated in both Korean ABS and Singapore CMBS last year,” says Fitch’s Ho. Indeed, Philippine Airlines is set to turn to the bank market with a US$60m securitisation of credit card receivables, arranged by Credit Suisse.
Rating agencies are optimistic that more deals will follow in 2012. Having upgraded Indonesia to investment grade (BBB–) in December 2011, Fitch says it is also receiving more ABS and CMBS enquiries out of Indonesia.
“Singapore will do one big deal again this year,” said Moody’s Cheng. Silver Oak was the third CMBS deal in three years from Singapore.
Analysts also expect covered bonds to add to the flow of deals.
“Covered bonds (obligations of banks that also benefit from recourse to a pool of assets) will continue to attract as banks across the region seek to diversify their funding sources and offset a potential slide in demand for unsecured funding if global markets remain volatile,” said Fabienne Michaux, credit analyst at Standard & Poor’s in Melbourne. Korean banks are likely to lead the way after enabling legislation this year, possibly via KHFC, which issued a covered bond in 2010, enabling sponsor banks to get off-balance-sheet-treatment benefits, according to Cheng at Moody’s. Australian banks have already launched their first covered bonds and Singaporean lenders are also said to be keen.
At least Asian securitisations are performing reasonably well, which is more than can be said of the shamed financing technique in the aftermath of the global financial crisis elsewhere in the developed world.
“Despite the economic turbulence abroad, Asia Pacific’s structured-finance market enjoyed solid rating performances in 2011, with the exception of some weaknesses in Japanese CMBS,” said Michaux at S&P. “We expect that to continue into 2012, with support from modest macroeconomic growth forecasts, low regional unemployment rates and easing monetary policy, along with the well-seasoned asset portfolios underlying many transactions.”
