Structured finance: the Asian market takes shape

The Structured Finance Conference held in Singapore in late September by the Asia Securities Industry & Financial Markets Association (ASIFMA) took ‘Asian Securitisation and Covered Bonds’ as its theme. The region’s structured finance community met with regulators, issuers and investors to discuss the development of the Asian market

While securitisation has been established in Asia for many years, Rahul Arora, head of structured and asset finance for Australian ‘big four’ banks Westpac observed that there has been a significant pickup in issuance over recent years. A large portion has been domestic issuance, especially in China, Malaysia, India and Indonesia. Cross-border issuance, by contrast, has dropped as Japan, Korea, Australia, Singapore and Hong Kong have not seen a significant amount of issuance recently. Paul McBride, a partner at law firm King & Wood Mallesons (KWM), also noted that 60% of issuance is in the private market.

Moody’s managing director Kei Kitayama singled out two key drivers of growth. On the macroeconomic side, China and Australia are rebalancing from export-driven to consumption-driven growth, so there is a need for liquidity. The second is diversification, as many banks want to expand their range of funding sources even though they have solid balance sheets. It is important to note, too, that there is a huge dichotomy between markets in Asia, each of which has different legal structures and taxes.

There has been significant regulatory development in Asia to support this growth, noted Colin Chen, managing director of Hong Kong bank DBS, as there is greater appreciation of the benefits of covered bonds. From a regulator’s perspective, Monetary Authority of Singapore (MAS) deputy director Boon Chye Ong added, priorities include ensuring transparency, building confidence and increasing the certainty of rules.

Ong sees infrastructure finance as an area where there will likely be strong demand going forward, especially since capital requirements constrain banks’ ability to provide long-term financing. Arora also expects portfolio securitisation to lead to financing for aircraft and potentially for shipping. “We’re at the arrowhead of development,” Chen added.

The issuer perspective

Damian Glendinning, group treasurer at Chinese technology multinational Lenovo said his firm’s experience with corporate securitisation dates back to 2006, when it set up a securitisation programme in the US. Now, however “in the US it’s dead, Europe is trying to revive it and Asia has its own additional issues.”

Challenges in Asia highlighted by Glendinning include the many different regimes and regulatory requirements and the need to review bank covenants once the company gives collateral. While asset-backed issuance should be attractive and result in a reduction in price, the reality is that it creates additional administrative strains. He also noted that banks have a lot of cash that they don’t know what to do with, and institutional investors also have large amounts of cash that need to place.

Lenovo completed a recent issuance as a currency hedging transaction. “Our operations in China are importing, paid in US dollars (USD),” said Glendinning. “We have a balance sheet position long renminbi (RMB), short USD. Hedging the RMB is expensive. At a holding company level, Hong Kong provided a hedge. Now, I buy fewer forwards.”

DBS’s head of wholesale and structured funding, Hong Nam Yeoh, said that the bank has been working on covered bond issuance as part of a drive to increase diversification and its funding profile. One challenge has been that DBS gets put in the emerging market even though it is a developed market credit. “When you come up with a covered bond product, it forces asset managers and bank analysts to look at your credit through a developed market lens.”

The investor perspective

From an investor perspective, Bank of Tokyo Mitsubishi UFJ’s head of securitisation in Asia, Taemoon Chung, identified accommodating clients’ needs as the key reason for investing in securitised assets, while Standard Chartered Bank director Ankit Garg noted that investors also focus on capital, and securitised assets provide a rating uplift as well as a chance to look at risk and ratings. One challenge, he said, is that the secondary market liquidity available in the US or Europe does not exist in most Asian markets.

Clifford Chance partner Chris Walsh added that covered bonds give corporate exposure to an excellent portfolio of assets, provide investors with certainty about their ability to pay, offer good disclosure levels and assure investors that their debit is issued in accordance with local and international standards.

Asked about rated versus unrated issuance, Mizuho Bank general manager Hiroyuki Kasama responded: “We don’t distinguish much between rated and unrated; we have our own criteria.” Garg, on the other hand, said his firm does not invest in unrated assets because capital charges on a non-rated deal are too high.

In an audience poll, 53% of conference participants chose “too much market liquidity” as the key factor holding the Asian structured market back, while 20% believed it is a lack of investors, 13% said it is poor bond market infrastructure and 13% cited regulation. Looking at the outlook for the market, Walsh highlighted opportunities in China and Singapore while Garg similarly sees developments in the covered bond market in Singapore as well as likely issuance in India.

Developments in China and future growth

Volume in China has been growing quickly over the past three years, reported Standard Chartered Bank executive director Steven Chen, with asset types including asset-backed securities (ABS), auto, non-performing loans (NPL) and credit card securitisation. About 70% of the issuers have been state-owned enterprises (SOEs), although issuance volume has decreased somewhat in the past year as SOE loan growth has slowed. Pricing has also dropped due to liquidity in the market, and recent auto finance deals were priced at about 2.85%. The market is complex, though, as there are three submarkets in China with three different regulators.

While many people are interested in the China market from an international investment perspective, said Moody’s senior vice president Jerome Cheng, new money by international investors is still quite small. He identified the three key considerations for international investors as legal and policy issues, data availability and transparency, and whether issuers in China can cover distressed periods.

Moving forward, KWM partner Roy Zhang said he expects huge growth from NPL and real estate, as well as from microfinance and for fintech companies. Chen agreed that the China securitisation market has high potential for growth.

Although structured finance volumes in many markets in Asia have been limited, there is significant potential in the larger emerging markets in particular. The conflux of bank capital requirements, needs in new sectors such as fintech or monetary financial institutions (MFIs) and increasing regulatory support could well lead to new opportunities.

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