World Peace Industrial, the Taiwanese semiconductor company, has confirmed yesterday that it will tap the country's embryonic securitization market later this year. SG and Industrial Bank of Taiwan, who recently completed the country's first ever ABS deal - a NT$3.65 billion ($104.8 billion) collateralized loan obligation - have been jointly mandated to arrange a NT$2 billion deal backed by World Peace's trade receivables.
The news should be well received by ABS practitioners as it is believed to be the first deal mandated by a firm in the corporate sector. Up until now the only entities that have announced their intention to do deals have been financial institutions, with residential mortgages and consumer finance receivables the major asset classes.
The pipeline includes offerings by Bank Sinopac, Chang Hwa Commercial Bank, Chailease Finance, Chinatrust Commercial Bank, Cosmo Bank, First Bank, Hua Nan Commercial Bank and Taishin International Bank.
However, the fragmented structure of the country's financial sector means that there are limitations to the size of asset pools that can be securitized and the number of repeat deals. That, and an extremely competitive bidding process, has tempered the enthusiasm of some foreign houses at the amount of business they can realistically derive from the Taiwanese market.
World Peace's decision to step up to the plate suggests that Taiwanese corporates may also be warming to how securitization can be used to clean up balance sheets as well as provide an alternative means of funding. If corporate awareness picks up, there may yet be enough activity to satisfy deal hungry ABS advisory teams as long as the Ministry of Finance can be convinced.
"It is still early to say how much potential there is in the corporate sector," comments a banker familiar with the World Peace mandate. "The current legislation is tailor made for financial assets but there is a degree of ambiguity on what else can be securitized. World Peace primarily wants to securitize existing account receivables - which count as financial assets - to get off balance sheet benefits. That should be OK, but we aren't sure about how the regulators will react to deals backed by future flows or real estate assets."
SG will certainly be delighted to have won a second mandate, having put in a fair amount of the initial legwork promoting the country's ABS market. Taiwan only passed its securitization legislation last summer, but SG was involved in much earlier discussions with the government on establishing a suitable framework for issuance.
In September 2001 the bank signed a cooperation agreement with IBT to jointly develop the securitization market in Taiwan. The following January, the two parties announced that they were moving ahead with plans for a collateralized loan obligation backed by IBT originated receivables.
The SG-IBT agreement is essentially a joint venture with both parties agreeing to work together on any mandate either is awarded. "We think it is a good strategy in this market," comments a source at SG. "IBT gets the benefit of our international experience and we benefit from IBT's local knowledge and client base. There are good synergies from the arrangement. Now that we have done the first deal, we are in a good position because we have gone through the deal process, know what is doable and what isn't, so we should be able to avoid certain problems going forward."
Having come to terms with the structural soundness of the transaction at the start of February, the Ministry of Finance approved the CLO, backed by a portfolio of 41 corporate loans. Fubon Securities was hired as lead manager to handle the placement.
The deal was split into two tranches: NT$2.766 billion of senior notes, rated twA by Taiwan Ratings Corp., an affiliate of S&P - and a NT$840 million subordinated piece to be held by IBT. The coupon for the senior bonds, which have expected average lives of 3.7 years and legal maturity of nine years, was set at 2.8%.
