SECURITISATION NEWS AND DEVELOPMENTS – April, 2001

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Read on for chronological listing of events, most recent on top:

 

 

Malaysian bad loans recovery agency considers securitization

Malaysia recently put in place securitization guidelines – see our news report below. Even before the ink could dry on the rules, there are a number of possible candidates, including the bad loans recovery agency Danaharta.

At the recent Malaysian Debt Conference, Danaharta's managing director said he is taking concrete steps to securitize and dispose some of its rehabilitated and performing loans later this year. He said Danaharta believes that asset-backed securitization will not only result in better recovery, but also assist in the widening and deepening of the ringgit bond market.

He went on to clarify that as at 31 December 2000, Danaharta had within its portfolio approximately RM5.45 billion of rehabilitated (and now performing) loans; of which approximately RM3.71 billion had been performing for more than 12 months (thereby indicating the robustness of their restructured cash flows). This (RM3.71 billion) would form the feedstock for the securitization venture as the loans could be offered in tranches.

A comment by a Communications officer of Danaharta dated 25th April 2001 affirms that Danaharta has requested and received proposals from a number of financial institutions – to help formulate the securitization mechanism and structure. There is still a bit of work left, for instance on structure and documentation.

Links See our country page on Malaysia – click here. For text of Malaysian law on securitization, click here.

Government Housing Loan Corp's debutante securitization likely to spur Japanese RMBS market

Japan could well be the securitization giant that it deserves, if this particular deal is a trend setter. Securitization markets in other countries contain a large component of RMBS transactions, which have been unseen in Japanese market due to lack of a Fannie Mae kind of body. But with the Government Housing Loan Corp (GHLC) making a recemt debut, that could well be history.

GHLC stepped into the RMBS market in March with a debut issue that raised USD 406 million. The offer was jointly led by CSFB, Goldman Sachs and Sanwa Securities. GHLC's plans include continuance of its securitization exercise raising some Yen 200 billion every year.

The GHLC series 1 secured passthrough notes will mature in 2036. The securities were priced at par with a coupon of 1.75 % – a spread of 45 basis points over 10-year swaps. They were supported by 2,831 residential mortgage loan contracts dated between April and June 2000.

In the typical structure, there is no true sale of the receivables by GHLC which continues to hold the loans, and has issued bonds directly to investors. The notes represent an undivided interest in the portfolio of loans held by GHLC, which is the legal equivalent of a floating charge. There is, however, an agreement with Mitsubishi trust that allows the transaction to be converted into a true sale, should it be so required.

Why not true sale? There was earlier a tax on transfer of receivables, which has since been removed, but Japanese lenders still have a taboo against transfers. They cite problems such as existing guarantee of a sister bank, which holds a first charge over the loans, etc. Are you aware of the reasons why Japanese home loan banks do not prefer a true sale? Are you aware of how would the transaction be accounted for in absence of a true sale, which is a requirement under FAS 140, or BIS capital standards as proposed? If so, please do write your comments.

Thai SEC finalises amendments to SPV law

It has almost been a couple of years since Thailand put in place the SPV law, but not of much avail as securitization is still a non-starter in the country. The Securities and Exchange Commission has recently approved amendments to the Securitisation Act in a bid to develop the debt market. The amendments are expected to be proposed to the Legal Reform Panel for consideration later.

The amendments are aimed at allowing establishment of SPVs with a multi-tiered structure as prevailing in the United States. Taxation has been a major problem area in Thai securitization – the Revenue Department also sees a possibility of tax incentives for SPVs. Value-added, corporate and special business taxes for SPVs are proposed to be waived for securitization SPVs.

Links: See our country page on Thailand for details

Securitization of timber plantation by Australian company sets good template

This deal is a quite small in international terms, but its structure may well set an example for those who would like to use securitization to promote plantation and farm finance. Timbercorp Finance has raised USD 16.9 million to securitise a portfolio of loans which will be repaid by plantation income.

The structure of the deal is as follows: Timbercorp invests approximately A$ 50 million in developing a certain plantation which includes land and infrastructure. It then provides a loan to individual investors who would buy a portion of this plantation. The purchase of plantation is funded to the extent of average 75% by the plantation company by way of a loan to the investors. In essence, therefore, the investor contributes 25% to the cost of development, and the 75% funding arranged by Timbercorp is what it uses for securitisation. So, the receivables being securitised by Timbercorp are receivables from portfolio of loans extended by it.

It has been extending such loans since 1992. The loans are 3 to 5 years amortising loans given to individual investors. The plantations are managed by a sister company of Timbercorp. The loans are secured by plantation – that is, timber, that has a value after 10 years or so. Because of this attractive backend value, investors are unlikely to default.

Vinod Kothari comments An attractive template for those who would think of funding plantations with involvement of retails investors. Makes a developmental use of securitization device.

Recession and credit card losses not to affect securitisation, says S&P

The U.S. economy is softening and could be headed for recession. The credit card industry, meanwhile, has not seen an economic downturn in a decade and, even with the economy strong, has been suffering high losses. If the economy turns down, will the securitisation investors be affected? Rating agency Standard and Poor's (S&P) says in a commentary dated 5th April that though credit card charge offs are expected to rise in 2001 and 2002, the same may not affect securitisation.

Recession might cause consumers to spend less. A slowdown in consumer spending will mean reduced borrowings and a lower supply of newly originated loans for securitization. Still, ABS new issuance volume is expected to increase in 2001. Relative to the cost of securitization, the cost of unsecured funds for finance companies has been on the rise and the ABS market has become a more attractive source of funding for many. The securitization rate jumped from only 13% a decade ago to 54% at the end of 2000. Large issuers are securitizing as much as 70% of their assets.

On the key question whether the increasing rate of charge offs means potential problems for securitisation investors, the report feels the charge off rate on credit cards to be around 6.1%, higher by 60 bps over the rate last year. However, a 60-basis-point increase in credit card charge-off rates will not have a major impact on the credit card-backed securities market in general.

Asian Pulp bankruptcy not to affect securitisation investors, says insurer

Financial risks insurer Centre Solutions does not expect any problems for the investors in a trade receivables transaction, totalling USD 250 million, originated by Asia Pulp & Paper Co Ltd (APP). Centre Solution is a unit of Zurich Finanical Services, and had provided financial risks insurance cover for the transaction. APP is based in Singapore and listed in NY, and is passing through one of the biggest debt workouts in Asia.

The securitisations were issued in 1999 and 2000 and are maturing only in 2003 and 2005 respectively. Though the rating of APP was CCC at the time of the issuance, the rating was hiked to AA on account of the enhancement provided by the insurer. The transaction represented trade receivables of APP from its forestry projects in Indonesia.

As usual for future flows transactions, there is a trapping mechanism for the cashflows which will be used for early amortisation of the investors' notes. However, recovery of the receivables is likely to be affected by claims of other creditors as also those of Indonesian restructuring agency IBRA. The case could be a crucial test for the legal strength of securitisation of future flows in Asia.

First European port revenue securitisation

According to a report by Rebecca Bream in Financial Times of 10th April, the Port of Tees and Hartlepool has become the first European port to securitise its revenues. The transaction allowed the Port to raise GBP305 million in an asset-backed bond issue.

The bonds are backed by the cash flows generated by Tees and Hartlepool's position in the bulk cargo, petrochemicals, container and oil and gas markets. Proceeds will refinance bank debt incurred when Nikko Securities' principal finance arm bought engineering and ports group Powell Duffryn, the port's owner.

Malaysia issues securitisation guidelines
Issuance to require prior approval of SC

Securities regulator in Malaysia, the Securities Commission, on 10th April issued the much awaited guidelines on offering securitised instruments. The report below captures the essential features of the Guidelines as also contains comments of Vinod Kothari.

A press release of the SC says that the Guidelines serve to set out clear and transparent criteria so that market participants are able to understand the SC's requirements. As a notable feature, prior approval of the SC will be required for any securitisation offer, which will also require the approval under the existing guidelines relating to issue of private debt securities. However, the SC is committed to a speedy clearance of such applications and will not take more than 28 days to clear the applications.

The assets that are eligible to be securitised must generate cash flow. The Originator must also have a valid and enforceable interest in the assets and in the cash flow of the assets prior to any securitisation transaction. Apparently, this seems to apply only to existing assets and future flows may not be securitisable at all.

The Guidelines, in essence, look backwards instead of looking forward. The SC has taken considerable time in issuing these guidelines and it is understood that a task force comprising of market practitioners joined the SC's staff in formulating these. However, the Guidelines have not kept up with the latest developments in the market such as synthetic securitisations and unfunded credit-derivative based transactions. The guidelines require the transfer of assets to the SPV to be fully non-recourse. The Guidelines state that any transfer of assets by an Originator to the special purpose vehicle must, in addition, comply with the "true sale" criteria. This, by itself, takes away the possibility of any credit-linked notes or synthetic securitisation, for which the scope in a country like Malaysia should have been phenomenal.

The Guidelines require the Originator to effectively transfer all rights and obligations in the assets to the special purpose vehicle and not retain any residual beneficial interest in these assets. As a limited credit enhancement by the Originator is almost a rule in securitisations, market practice will perhaps evolve on the style of US securitisations – two tier SPVs with the first transfer to the SPV being without recourse and without any enhancement, but the second transfer to be with required enhancement.

The Guidlines also eliminate the scope for offshore securitisation: in that the SPV is required to be a Malaysia-resident. The Guidelines provide stamp duty and real property gains tax exemption to SPVs, but are silent on income-tax exemption – which again might remain a grey area in case of bond/note structures.

Links For more on securitisation in Malaysia, click here.

More developments We will come back with more analysis of the guidelines soon on this site.

Workshop in Malaysia Vinod Kothari will offer a 3-day workshop in Malaysia to analyse legal, regualatory, tax and accounting issues,including the latest SC Guidelines on May 14-15-16, 2001. See details here.

CDO activity surges 500% in Europe
Overall securitization volume grows 60%

The tremendous surge in CDO activity in Europe was visible as the volume in the first quarter of 2001 increased 500% over corresponding period in 2000. A press release by Standard and Poor's says that the volume in Q1 of 2001 was USD 15.2 billion compared to USD 2.3 billion in the same three months last year.

The volumes were largely propelled by European banks' and fund managers' increased use of CDO technology as a balance-sheet management tool and for arbitrage purposes. Typically, European banks have used CDOs for funded as well as unfunded transactions.

Among other securitization segments, overall rate of growth in 2001 1st quarter was 60% higher than same period last year. The RMBS market sustained its solid growth pattern in the first quarter of 2001, ending a strong 39% higher at $7.9 billion compared with $5.7 billion a year earlier.

In the CMBS segment, volumes ended at USD 179.7 million compared with USD 3.1 billion in the same period last year. However, the rating agency sees the European CMBS market as still pegged as a prominent growth area in 2001.

The total securitization volume in Europe ended massive 60% higher at $29.9 billion compared with $18.7 billion in the same quarter of 2000.