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Asia-PacificJune 5 2005

Investors acquire taste for exotic bond deals

A string of small securitisation deals is encouraging finance companies in Thailand to take a closer look at this class of bond, though hurdles remain, says Simon Montlake.
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Securitisations may be mainstream offerings in Europe and North America but they remain an exotic item in most Asian markets. In Thailand – which knows first-hand what can happen when a hiccup turns into a crisis – there is growing interest in securitising future flows to give lenders greater flexibility in capital management. The deals are still small but investors are getting a taste for this new class of bonds.

Tighter supervision

Clearly, the Asian financial crisis was a wake-up call for financiers of all descriptions. However, it is telling that it was Thailand’s poorly run finance companies that were among the first to hit the wall. Their successors are now at the forefront of the securitisation trend, while operating under much stricter supervision by the Bank of Thailand.

Last year, AEON Thana Sinsap completed a landmark deal, selling Bt1.5bn ($37.6m) in bonds backed by receivables from hire-purchase consumer loans. Underwritten by Standard Chartered, it was the first private sector asset-backed issuance under the 1997 Securitisation Law that set the framework for such deals. Thai institutional investors took the six-year bonds with a revolving period of 3.5 years, giving the fledgling market a shot in the arm.

Encouraged by the success of this issue, AEON, a subsidiary of Japan’s AEON Credit Services, returned to the market in February with another first in securitised credit card receivables. This time a special purpose vehicle (SPV) issued two Bt1bn notes due 2008 and 2010, netting a better response from the market. The notes were pegged to receivables from AEON’s credit card business, which has 1.1 million cards outstanding.

But the biggest private issuer to date is Siam Industrial Credit, which recently sold Bt4bn in debentures backed by automobile loans. The issuer – which is 39%-owned by Siam Commercial Bank, one of Thailand’s biggest lenders – used its receivables from auto financing to structure a bond due 2011 that is rated AAA by Fitch Ratings.

It may be too soon to call it an unstoppable trend but the signs are positive. “We expect growth to accelerate over the next couple of years and an ongoing development in structured finance in the Thai market. Clearly, there’s a demand both on the originator [issuer] and the investor side, and we expect that to continue to grow,” says Vincent Milton, managing director of Fitch’s Thailand operations.

Stephen Jaggs, a partner at law firm Allen & Overy, which advised on the AEON credit-card deal, agrees. “People are becoming more comfortable with the Securitisation Act as a legal framework, though lawyers must be creative in structuring deals,” he says.

Auto loans are certainly one pool of assets that appear ripe for structured finance. Thailand is home to many of the world’s leading car makers and the domestic market is growing rapidly. Sales topped 626,000 units in 2004, helping finance companies to boost hire-purchase lending by 28% to Bt175.3bn over the same period.

Property is buoyant

Many bankers are also watching the mortgage market with baited breath, spying an opportunity for asset-backed securitisation. About Bt1000bn in housing loans are held by government lenders and commercial banks, and the property market remains buoyant in Thailand.

However, the securitisation market’s future may hinge on government spending plans and the extent to which Thailand’s financial sector is flush with liquidity. Prime minister Thaksin Shinawatra, who was re-elected with a large parliamentary majority in February, is committed to a raft of infrastructure projects and his economics team has shown interest in securitisation as a tool for off-balance-sheet funding.

One deal that is likely to come to market soon is a government project to relocate several ministries to a new purpose-built complex on the outskirts of Bangkok with a price tag of Bt24bn. Observers say the financing plan will include issuing securitised notes backed by lease payments to a project company. The issue could prove a dry run for securitising future infrastructure spending in Thailand, including expanding Bangkok’s mass-transit system, though some bankers remain sceptical about the government’s resolve.

Slow progress

“The Thai government is pretty supportive [of securitisation] but it takes a long time for them to do something compared with other markets in northeast Asia,” says Lesi Zuo, director of asset securitisation at Standard Chartered in Hong Kong.

He gives the example of Taiwan, which passed a securitisation law in 2002. “Taiwan started later than Thailand, but once it decided to move it has gone really fast. We’ve seen some major transactions in the past three years.”

The government’s renewed interest in securitisation has given fresh impetus to calls for amendments to the 1997 law. Thailand’s Security Exchange Commission is drafting proposals that would allow public offerings of securitised bonds and give a strong legal basis for assigning future receivables to SPVs. Another proposal on the table is to adjust the withholding tax rules to attract foreign investors to future asset-backed securitisations. However, analysts say the current framework is workable based on the success of the issuances to date.

Thailand’s Bond Dealing Centre lists the securitised paper that has been marketed so far. But it is not a liquid market, according to Orawan Karoonkornsakul, director of corporate business at Fitch Ratings. “There are not many deals being done here so it’s unlikely that there will be a secondary market. We need to wait until a number of deals are done so that we have more transactions in the market,” she says.

Bank interest

So far, Thai banks have shown little interest in securitising their balance sheet items. But rising interest rates, coupled with the demand for corporate loans and increased infrastructure spending, could prompt bankers to consider new ways of structuring their portfolios. “I think the banks will start to look at securitisation again for funding diversification and capital management,” says Fitch’s Mr Milton.

Apichat Mantaterm, executive director of AEON, believes that others are keen to follow the trail blazed by his company. “Everyone is interested now, not only the finance companies but also the banks. I think everyone wants to do securitisation deals, but a lot depends on the rating [of the issuance],” he says.

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