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ASEAN+3 Workshop on the Rise of Asset Securitization in East Asia (S ponsor: Ministry of Finance, P.R.China; Co-organizers: APEC Finance and Development Centre and World Bank ). Asset Securitisation in East Asia Ismail Dalla Royalton Hotel, Shanghai, P.R.China November 7-9, 2005.

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asset securitisation in east asia ismail dalla royalton hotel shanghai p r china november 7 9 2005

ASEAN+3 Workshop on the Rise of Asset Securitization in East Asia(Sponsor: Ministry of Finance, P.R.China; Co-organizers: APEC Finance and Development Centre and World Bank)

Asset Securitisation in East Asia

Ismail Dalla

Royalton Hotel, Shanghai, P.R.China

November 7-9, 2005

Views expressed in this presentation do not represent official views of the World Bank

fixed income securities market in usa
Fixed Income Securities Market in USA

Source: The Bond Market Association

role of asset backed securities markets in the economy
Role of Asset-Backed Securities Markets in the Economy
  • Development of domestic bond market
  • Development of residential mortgage market
  • Additional funding source for capital constrained financial institutions and corporations.
  • As a risk management instrument, securitization can reduce risk in the financial market
  • Potential investment opportunities for domestic and regional institutional investors.
  • Potential source for infrastructure projects.
securitizable assets
Securitizable Assets
  • Residential mortgages
  • Commercial mortgages
  • Hire-purchase receivables
  • Small business loans
  • Credit card receivables
  • Nonperforming loans
  • Worker remittances
  • Bond portfolio
  • Collateralized mortgage-backed or loan backed obligations (CMOs or CLOs)
  • Tax liens
  • Toll road receivables
  • Trade and export receivables
  • Utility (e.g., electricity, telephone, and water receivables)
  • Oil and gas receivables
  • Service contracts

Source: Asset-Backed Securities Market in Selected East Asian Countries, Ismail Dalla, World Bank, July 2002.

asset backed securities terminology
Asset-Backed Securities Terminology
  • Securitization involves the repackaging of generally illiquid assets that generate cash flows. The assets are sold to a special purpose vehicle whose sole function is to buy such assets in order to securitize them. The attractiveness of the transaction is that it separates the assets from the credit profile of the company that originally owned them. By adjusting the tranche amounts and term structure, the assets can be altered to suit the needs of investors. In addition, swaps, guarantees, and reserve funds can be used to enhance the creditworthiness of the newly issued securities, making them desirable for a broader range of investors.
  • Collateralized Debt Obligation. A security backed by a pool of assets. CDOs do not specialize in one type of debt. Those that do include collateralized bond obligations (CBOs) and collateralized loan obligations (CLOs)
  • Monoline insurer. Agencies that provide credit guarantees. They began by offering guarantees on municipal bond defaults, but have branched out.
asset backed securities terminology9
Asset-Backed Securities Terminology
  • Mortgage-backed securities. A bond that represents a securitized interest in a pool of mortgages. The simplest form of MBS is a mortgage pass-through. With that structure, all principal and interest payments (less a processing fee) from the pool of mortgages are passed directly to investors each month. There are residential (RMBS) and commercial varieties (CMBS) of these bonds.
  • Originator. Almost any entity that originates a receivable. Examples include a finance company with a pool of loans, a utility company selling electricity, or a credit card company.
  • Obligor. The entity that pays the receivable, including the guarantor of the payment.
  • Pass-through. Refers to mortgage pass-through securities when one or more mortgages are pooled and sold off. The cash flow of the resultant securities depend on the cash flow of the underlying mortgages.
  • Receivable. The obligation to pay money. This can take many forms, such as payments on a loan, lease, or bond. Almost any cash flow can be securitized, though the receivable must be convertible into cash and the cash flow usually needs to be predictable.
asset backed securities terminology10
Asset-Backed Securities Terminology

Seniority. Affording a certain class of securities with a priority in claiming assets. It usually confers a greater creditworthiness, while subordinated issues offer higher yields.

  • Servicer. They collect the payments on the receivables and are usually the originator. This is necessary since special-purpose vehicles typically have no staff or premises.
  • Special-purpose vehicle. The entity that purchases the receivables and issues securities backed by them. It is typically structured to provide bankruptcy remoteness, insulating the issuer from the originator. SPVs are usually located in a tax-neutral location such as the Cayman Islands or Bermuda. SPV activity is typically restricted to the transaction being contemplated.
  • Tranches. Different securities classes, typically with different payment structures and credit profiles.
why invest in abs
Why invest in ABS?
  • Attractive yields ( a yield pick up of 30-70 basis points over treasury)
  • High Credit Quality
  • Diversification
  • Predictable cash flows
  • Reduce Event Risks.
an example of securitization korea asset funding 2001 1 us 367 million
An Example of Securitization-Korea Asset Funding 2001-1(US$367 million)
  • The Korean Government established Korean Asset Management Corp. (KAMCO) to deal with the nonperforming loans of the state-owned Korea Development Bank. KAMCO aimed to restore the liquidity and soundness of Korean banks by disposing of their problem loan portfolios.
  • The $367 million floating rate bond issue was underpinned by a portfolio of restructured loans that KAMCO bought from Korean banks. Put options for the loans allowed recourse provisions to each originating bank in the case of default. Due to Korean law, the securitization of these loans was a two-step process. They had to be transferred to a special purpose corporation outside Korea, and then financing was raised through a separate offshore vehicle. A swap was included, as 10% of the portfolio was yen-denominated, and the Korea Development Bank (KDB) provided a credit facility worth 30% of the deal. Subordinated notes of around $53 million were issued back to KAMCO.
  • The deal was 3.5 times oversubscribed and was considered the asset-backed deal of the year.
kal japan abs 1 cayman ltd
KAL Japan ABS 1 Cayman Ltd
  • KAL Japan ABS 1 Cayman Ltd.(Y27 billion) KAL Japan ABS 1 Cayman Ltd. (the Note Issuer), a limited liability company incorporated in the Cayman islands issued Y27 billion of secured floating rate notes. The transaction is a securitization of yen-denominated future ticket receivables originated by Korean Air Lines Co., Ltd. in Japan for flights including its Japan-Korea routes. The Korea Development Bank (KDB) provided unconditional and irrevocable yen-denominated credit facility and covers full payment of principal, interest, and priority expenses on the notes.
kal japan abs 1 cayman ltd18
KAL Japan ABS 1 Cayman Ltd

Entrustment of BSP

Receivables and Bank Account Rights

Trustor/Servicer

Korean Air Lines Co., Ltd

Japan Trust

Investor and Seller Certificate

Invest Certificate

Liquidity Reserve

Bond Issuers, Tokyo Branch

KAL Japan ABS 1 Ireland Plc

Inter-Office Funding Memo

Bond Issuer

KAL Japan ABS 1 Ireland Plc

Yen Bond

Yen

Credit Facility Provider

Korea Development Bank

Note Issuer

KAL Japan ABS 1 Cayman Ltd

Yen Notes

Yen

Investors

Swap Provider

Korea Development Bank

Source: Fitch Ratings

malaysia the runner up in local abs
Malaysia-the runner up in local ABS

Source: Rating Agency Malaysia

malaysia abs by asset type 2001 sep 05
Malaysia: ABS by Asset Type (2001-Sep 05)

Source: Rating Agency Malaysia

asset securitisation and implications on financial markets
Asset Securitisation and Implications on Financial Markets

Positive

  • A new financial instrument that facilitate development of bond market which in turn help create a more diversified financial markets. Can also be used for open markets.
  • Improve risk management in the financial system and therefore reduce financial vulnerability.
  • Create a new investment vehicle for investment for institutional and high net worth investors in the region.
  • Increase liquidity for financial institutions. This would enable them to increase lending to corporate and households especially for housing finance.
securitisation of the government s islamic house financing debts and the issuance of islamic rmbs

CAGAMAS BERHAD

Equity

(100% Ownership)

True Sale of RM2,844 million Portfolio Pool

Issuance of RM2,050 million

IRMBS

GOVERNMENT’S HOUSING LOANS DIVISION

CAGAMAS MBS BERHAD

(ISSUER)

SUKUK MUSYARAKAH INVESTORS

Cash Settlement

IRMBS Proceeds

Portfolio Pool of RM2,844 million (Collateral/Security)

TRUSTEE AND SECURITY AGENT

Securitisation of the Government’s Islamic House Financing Debts and the Issuance of Islamic RMBS
  • :

Source: Cagamas

asset securitisation and implications
Asset Securitisation and Implications

Challenges

  • Complex administration of capital adequacy under BASEL II. Should AAA rated securitized assets be given preferential treatment for capital adequacy?.
  • Clear regulatory framework for securitization covering the accounting and tax treatment of SPV and other service providers.
  • Increase in securitization reduce the efficacy of monetary policy (Arturo Estrella, FBRNY, Economic Policy Review, May 2002.
  • Lack of liquid market can create valuation problem for ABS and the calculation of capital adequacy (marked to market issue).
prospects for abs markets 2005 2006
Prospects for ABS markets (2005-2006)

Countries

  • Rapid Growth : Malaysia, China
  • Moderate growth: Hong Kong and Singapore
  • Emerging growth: Indonesia, Thailand, Philippines

Assets: Infrastructures (Thailand, Malaysia, Singapore, Indonesia).

Non-Performing loans: China

Credit Cards: Thailand, China, Indonesia.

RMBs: China, Indonesia, Thailand, Korea

asset securitization in east asia
Asset Securitization in East Asia

Thank you

Ismail Dalla (idalla@worldbank.org)