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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 AsiaIsmail Dalla

Royalton Hotel, Shanghai, P.R.ChinaNovember 7-9, 2005

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

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Financial Sector Profile (Dec 2004)-The rise of bond market

Nominal GDP of 2004*

US$ billion US$ billion % GDP US$ billion % GDP US$ billion % GDP

China, People's Republic of 2) 1,606.9 483.3 30.1 447.7 27.9 3,261.8 203.0

Hong Kong, China 168.8 78.2 46.3 861.5 510.4 790.6 468.5

Indonesia 231.8 57.7 24.9 73.3 31.6 132.5 57.2

Korea, Republic of 654.9 568.5 86.8 389.5 59.5 736.1 112.4

Malaysia 112.5 106.7 94.8 181.6 161.4 180.2 160.2

Philippines 89.9 25.0 27.8 28.6 31.8 58.9 65.5

Singapore 100.5 78.6 78.2 217.6 216.5 201.4 200.4

Thailand 155.6 66.5 42.7 115.4 74.2 173.3 111.4

TOTAL 3,121.0 1,464.5 46.9 2,315.1 74.2 5,534.8 177.3

Germany 2,484.1 2,225.7 89.6 87.8 3.5 5,857.6 235.8

Japan 3) 4,412.4 8,953.0 202.9 3,557.7 80.6 7,589.1 172.0

United Kingdom 1,903.7 1,040.8 54.7 2,865.2 150.5 6,970.1 366.1

United States of America 4) 11,723.3 19,186.6 163.7 16,323.5 139.2 9,743.7 83.1

Data sources:

GDP = World Development Indicators. International Financial Statistics, Jun. 2005

Bonds = World Federation of Exchanges, Table 16 A, Table 16B; BIS; ADB, Asian Bond Indicators

Equities = World Federation of Exchanges, Table on Equity - 1.1.Domestic Market Capitalization

Banks = International Financial Statistics, Jun. 2005

Notes: 1) Deposit money banks only. The US banking data include banking institutions, credit unions, and savings institutions.

2) Shanghai SE, and Shenzhen SE

3) Tokyo SE, and Osaka SE

4) Includes AMEX, NASDAQ, and NYSE

* Estimation.

CountryBonds Equities Banks

1)

/Economy

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The Size of Debt Securities in 2004

Government Financial Inst. Corporate Total % of World

Total

Euro area 5,495.0 3,051.6 1,023.4 9,570.0 21.7%

France 1,175.6 696.3 263.5 2,135.4 4.8%

Germany 1,192.5 900.9 132.2 2,225.6 5.1%

Italy 1,494.9 635.3 241.7 2,371.9 5.4%

United Kingdom 674.3 334.7 31.9 1,040.9 2.4%

Canada 555.7 104.2 98.1 758.0 1.7%

United States 5,526.4 11,078.8 2,581.3 19,186.5 43.6%

Japan 6,836.7 1,240.6 789.4 8,866.7 20.1%

87.1%

Emerging market countries of which:

Asia 886.4 492.2 254.2 1,632.8 3.7%

Latin America 457.7 82.2 32.1 572.0 1.3%

Europe 323.4 3.6 4.3 331.3 0.8%

Africa 78.3 12.1 14.2 104.6 0.2%

World 21,703.1 17,248.4 5,097.2 44,048.7 100.0%

Source: BIS, Infrastructure and Financial Market Review, IDB, March 2005.

Notes: Asia includes China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand.

Latin America includes Argentina, Brazil, and Mexico. Europe includes Czech Republic, Poland, and Turkey.

Sector/Country

Debt Securities

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East Asian Bond MarketsOutstanding Domestic Bonds

(in US$ Billion)

US$ billion

%US$

billion%

US$ billion

%US$

billion%

US$ billion

%US$

billion%

US$ billion

%

China, People's Rep. of 166.6 28.0 215.0 29.0 265.6 32.5 315.6 34.6 377.3 34.4 440.4 40.1 483.3 33.0

Hong Kong, China 51.4 8.7 57.1 7.7 60.5 7.4 63.3 6.9 68.3 6.2 71.9 6.6 78.2 5.3

Indonesia n.a. n.a. 45.1 6.1 49.4 6.1 45.1 4.9 55.2 5.0 64.4 5.9 57.7 3.9

Korea, Rep. of 240.0 40.4 265.4 35.8 268.9 32.9 292.7 32.1 380.9 34.7 445.7 40.6 568.5 38.8

Malaysia 61.9 10.4 66.1 8.9 74.7 9.2 82.7 9.1 84.3 7.7 98.8 9.0 106.7 7.3

Philippines 21.1 3.6 22.5 3.0 19.9 2.4 20.7 2.3 20.9 1.9 24.1 2.2 25 1.7

Singapore 29.5 5.0 37.3 5.0 44.6 5.5 54.8 6.0 61.5 5.6 67.2 6.1 78.6 5.4

Thailand 23.7 4.0 33.1 4.5 32.6 4.0 37.6 4.1 48.6 4.4 58.4 5.3 66.5 4.5

East Asia 594.2 100.0 741.6 100.0 816.2 100.0 912.5 100.0 1,097.0 100.0 1,270.9 100.0 1,464.5 100.0

200420031998 1999 2000 2001 2002

Source: ADB, Asia Bond Indicators, BIS

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Fixed Income Securities Market in USA

Source: The Bond Market Association

Outstanding Bond Market Debt(US$ Trillion) June 30, 2005

Corporate bonds $5.0 T

Mortgage related $5.6 T

Federal Agency $2.7 T

Treasury $4.0 T

Money market $3.2 TMunicipal,

$2.1 T

Asset-backed securities

$1.9 T

9%

8% 13%

20%

23%

11%

16%

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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 marketPotential investment opportunities for domestic

and regional institutional investors. Potential source for infrastructure projects.

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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.

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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.

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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.

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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.

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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.

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Cross Border East Asia Securitization Transaction by location of assets (US$ million)

US$ Mil % US$ Mil % US$ Mil % US$ Mil % US$ Mil %

Hong Kong 300.0 25.1% 0.0 0.0% 0.0 0.0% 419.9 35.0% 566.3 18.1%

Korea 769.0 64.4% 2,301.4 90.2% 3,222.9 78.4% 652.9 54.4% 1,553.8 49.8%

Singapore 125.0 10.5% 0.0 0.0% 290.1 7.1% 127.8 10.6% 1,002.0 32.1%

Malaysia 0.0 0.0% 250.0 9.8% 600.0 14.6% 0.0 0.0% 0.0 0.0%

Cross-Nation 33.3 2.8% 192.3 7.5% 141.3 3.4% 374.5 31.2% 0.0 0.0%

Total 1,194.0 100.0% 2,551.4 100.0% 4,113.0 100.0% 1,200.6 100.0% 3,122.0 100.0%

_______________________________

Source: Moody's Investors Service, IFS

20042000 2001 2002 2003

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Cross-Border Asset-Backed Securities Transactions in Asia (2000–2004) US$ million

The Size of ABS Issuance by Assets

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2,000 2,001 2,002 2,003 2,004

(mill

ions

of

US

$)

Global CBO/CLO

Equipment Leases

CMBS

Real Estate

Auto Loan

CBO/CDO/CLO

RMBS

Credit Card

Others

Source: Moody's Investors Service

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Korea is the largest ABS market in East Asia (x Japan)

KoreaABS Issuance: 2004(In KRW, trillions)

Originator 2001 2002 2003 2004 %change

2003-4

Credit-specialized finance companies21.5 28.1 19.2 8.5 -55.7%

(Credit card companies) 19.4 20.7 10.9 3.5 -67.9%

Banks 12.0 1.8 6.3 6.4 1.6%

Securities companies 8.4 2.0 7.0 3.0 -57.1%

Korea Housing Finance Corporation 3.0

Others 9.0 7.9 7.4 6.1 -17.6%

Total amount 50.9 39.8 39.9 27.0 -32.3%

Exchange rate 1,314 1,186 1,193 1,035

Total amount (US$ billion)) 38.8 33.6 33.5 26.1

Total number of ABS issues 194 181 191 170 -11.0%

_____________________________

Source: FSS

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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.

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Korea Asset Funding 2001-1

The Purchaser Korea 1st International ABS

Specialty Co. Ltd

KDB

Kamco

UBS Deutsche Bank

The Issuer Korea Asset Funding 2000-1 Ltd.

Investors

Principal and interest payments

Yen/US$ Swap

Sources: Asiamoney; Fitch

Banks

Loan obligors

Payments under Put options

Credit Facility

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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.

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KAL Japan ABS 1 Cayman Ltd

Trustor/ServicerKorean Air Lines Co., Ltd

Bond Issuers, Tokyo BranchKAL Japan ABS 1 Ireland Plc

Bond IssuerKAL Japan ABS 1 Ireland Plc

Note IssuerKAL Japan ABS 1 Cayman Ltd

Investors

Japan Trust

Liquidity Reserve

Credit Facility ProviderKorea Development Bank

Swap ProviderKorea Development Bank

Entrustment of BSP Receivables and Bank Account Rights

Investor and Seller Certificate

Source: Fitch Ratings

Invest Certificate

Inter-Office Funding Memo

Yen Bond Yen

Yen Notes Yen

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Malaysia-the runner up in local ABS

Issuance by Value and Volume

6,310

920

1,800

3,5682,9163

4

3

5

6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2001 2002 2003 2004 Sep-050

2

4

6

8Issue Volume (RM mil) (LHS)

No of Transactions (RHS)

Source: Rating Agency Malaysia

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Malaysia: ABS by Asset Type (2001-Sep 05)

Issuance Value by Asset Type

Credit card receivables1%

Auto-loans receivables4%

Residential mortgages23%

Commercial properties11%

CDOs27%

Progress payment receivables*

34%

Source: Rating Agency Malaysia

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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.

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

:

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

IRMBS Proceeds

Issuance of RM2,050 million IRMBS

Cash Settlement

True Sale of RM2,844 million

Portfolio Pool

GOVERNMENT’S HOUSING LOANS

DIVISION

TRUSTEE AND SECURITY AGENT

CAGAMAS MBS BERHAD(ISSUER)

CAGAMAS BERHAD

SUKUK MUSYARAKAH

INVESTORS

Equity

(100% Ownership)

Source: Cagamas

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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).

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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

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Asset Securitization in East Asia

Thank you

Ismail Dalla (idalla@worldbank.org)