Experience of Developing Economies in Securitization: Thailand

1. Experience of Developing Economies in Securitization: Thailand Mr. Thirachai Phuvanatnaranubala Secretary-General, Securities & Exchange Commission, Thailand At the ASEAN+3 Workshop on the Rise of Asset Securitization in East Asia (November 7-9, 2005, Shanghai)

2. Experience of Developing Economies in Securitization: Thailand • Step of Development • Market Performance • Impediments • Future Need for Securitization • Conclusion

3. 1. Step of Development • Policy first conceived under 7th Plan (1992-1996) • Promote long-term savings • Support capital market development • Enacted Securitization Act (1997) • Allow setting up of SPV • Bankruptcy remoteness for SPV • Exempt tax on transferred assets

4. 1. Step of Development • Established Secondary Mortgage Corporation (Jan. 1998) • To carry out businesses: • Secondary mortgage portfolio business • Housing mortgage securitization business

5. 2. Market Performance Issuance of Corporate Bonds in Thailand Asian Issuance of Securitized Bonds : 2003 Source : Securities and Exchange Commission, Thailand Source : Thomson Financial YE 2004, cited by HSBS, Structured Capital Markets in Asia, 16 June 2005 • Small issuance value • Account for less than 6% of total corporate bond issuance • Low development compared to Asian region

6. 2. Market Performance Assets of Securitized Bonds in Thailand Source : Securities and Exchange Commission, Thailand • Limited range of asset type used for securitization • Credit card, trade account are not popular

7. 3. Impediments • Market conditions not conducive to securitization • Contraction of investment after financial crisis • Excess liquidity in the financial system • Low interest rate environment • Little need for securitization as a funding source (1997-2004)

8. 3. Impediments • Legal issue • No trust law to recognize different class of assets • In case of originator bankruptcy, although remote, there is possibility of claw back if transfer proved to be fraudulent • Existing law : • Does not address future receivables • Does not yet allow public offering

9. 3. Impediments • Tax issue • SPV is subject to corporate income tax • Accounting issue • No specific accounting standard for securitization scheme • Under IAS : Require consolidation of SPV and originator • Transferred assets not treated as true sale • Consolidation reduces benefit to originator

10. 3. Impediments • Market infrastructure • Inadequate market information on • Default rate • Prepayment rate • Lead player • Government Housing Bank not subject to BIS ratio, no pressure to sell off mortgage loans

11. 4. Future Need for Securitization • Rapid growth in credit market (housing mortgages, credit cards)

12. 4. Future Need for Securitization • Increasing importance for private business sector • Need for funding to support investment expansion • Upward interest rate trend • In line with rising interest rate in major markets • Pressure from inflation under high oil prices • Decline in market liquidity • Banking sector adjustment • Need for larger capital base under new capital accord (BASEL II) • Additional capital base for operation risk • Stricter approach on loan classification

13. 4. Future Need for Securitization • Important financing for government’s infrastructure projects • In need of large amount of funding • External financing by borrowing up to 40-50% Source of Financing Mega Projects 41% 41% 41% 45% 58% Source : Ministry of Finance Note : * State-owned enterprises

14. 5. Conclusion • Securitization is new to Thailand • Market development has been slow • There obstacles remain • Tax issue • Legal issue • Accounting issue • In need of securitization as a funding source for future economic development • Private business sector; investment expansion • Banking sector; new capital accord • Public sector; infrastructure projects • Effort to reform market is underway