Q&A with Paul Kruger

One-on-one with Linklaters' Paul Kruger on emerging trends in the Asian ABS market

Paul Kruger is a structured finance and securitisation specialist and, since the early 1990s, has been at the forefront of the development of the securitisation market in Asia. Kruger was elected a partner in Linklaters' Tokyo office in early June.

In this FinanceAsia interview, Kruger speaks candidly about emerging trends in the Asian ABS market. He looks at significant developments in terms of deal structuring and also discusses where he believes the most lucrative, challenging and innovative deals are likely to come from in the short to medium term.

From a legal perspective, what have been the major developments of the Asian securitisation market over the past few years?

The Asian securitisation market has seen a number of peaks and troughs since the first deals were launched a little over ten years ago with the consumer finance crisis in Korea representing one of the most significant troughs. Korean credit card companies in particular were facing mountains of bad debt and were effectively shut out of the cross-border market. Transactions were hitting early amortisation triggers and companies were under severe financing constraints. At the same time, however, we saw the Korean RMBS market come to life with transactions from Samsung Life and KFB. Having worked on all of the cross-border RMBS deals to date, our team has been at the forefront of the Korean ABS market - all signs point towards increasing cross-border activity across the asset spectrum.

Taiwan is another interesting market. We are working on a number of transactions in Taiwan at the moment and are seeing a consistent pipeline of new transactions. At the beginning of the development of the market in Taiwan, it was a relatively arduous process to get deals completed, sometimes taking up to a year to take a deal from mandate to launch. The impression was that issuers had not yet reached the stage where securitisation was a core funding strategy which detracted from the urgency to get deals completed. Things have now changed considerably with a real desire to get deals done.

China is undoubtedly the sleeping giant. There has been some landmark legislative milestones in the development of that market, going back to the Contract Law that made it possible to assign receivables without the consent of the debtor, the enactment of the Trust Law which effectively provided an avenue to isolate the assets from the originator through a trust, and now the new Trial Rules which are in place but which are limited in application to the currently active pilot deals from China Construction Bank and China Development Bank. These two pilot deals are important for the development of the Asian market as a whole and I truly hope they are well received. The market is expecting the success of these deals to lead to other originators being allowed to use the same Trial Rules. Should this happen, I believe we will see a substantial increase in issuance out of China. I have no doubt, however, that the PRC authorities are going to be cautious in the development of that market.

With the first-class platform that Linklaters has in the PRC, there is little doubt that we will be well placed to be at the forefront of market developments as they happen.

Where do you think the most innovative deals are likely to come from in the Asian market?

One of the most innovative deals to emerge out of Asia recently was the Hong Kong Link securitisation - this deal took immovable infrastructure assets and issued securities to retail and institutional investors. The size of the transaction, the asset-type and the fact that it was sold to retail investors made it hit the headlines globally.

There is a lot of interest from other governments around Asia in seeing if techniques like this can be used to fund their infrastructure projects.

What do you foresee to be the biggest challenges facing Asian ABS?

A facet of the market worth watching is the development of synthetic transactions. The problem that the market is currently facing is how will the regulators approach large synthetic deals? To a certain extent this depends on the pace of implementation of Basel II - a lot of countries have yet to fully implement Basel I. There is no point in a bank doing a large deal without getting some form of capital relief in return.

A further innovation is master trust programs for repeat issuers. This is not yet a feature of the market, although a number of originators have toyed with the idea of setting up a master trust program. Regulators, such as those in Korea, are not yet comfortable with allowing a single vehicle to issue multiple tranches of securities. However, if you look at the US and European markets, master trusts are very common, so it has to happen in Asia eventually. It is definitely a part of the market that needs to develop in order to bring a level of efficiency that just isn't there yet.

What gives Linklaters the edge over its competitors?

At Linklaters, we have arguably the best equity and debt capital markets practice of any firm in Asia. If you look at the deals that are done out of this firm in Hong Kong, Singapore and Tokyo, as well as across Asia generally, Linklaters is second to none. I have always viewed securitisation as an adjunct to a thriving capital markets practice, and the platform that Linklaters has is without doubt the very best. You are, however, only as good as your last deal. We strive to give bankers the confidence that we are the lowest risk execution solution for them. We are determined to provide the clients with the best service that can be delivered.

In terms of the firm's commitment to Asia, Stuart Salt's recent arrival from London to head up the Asian Banking and Projects team is an excellent example of investment in the region and in the finance sector by the firm. Stuart is recognised globally as a market leader in finance and energy. He joins Patrick Fontaine, Trevor Clark and John Maxwell in Hong Kong who are powering along on some of the most high profile finance deals in the region. In Japan, the firm's structured finance practice is prospering from the recent election of partners Mitsuhiro Yasuda and Akihiro Wani, and in Thailand Veeranuch Thammavaranucupt adds further strength to the Asian securitisation team.

Few firms (if any) can match Linklaters for depth of securitisation and structured finance capability and experience across Asia.

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NOTE

Prior to joining Linklaters, Paul Kruger was head of the Asia Capital Markets Group at Clifford Chance. He has recently been followed to Linklaters by his team of Mary Matson, Paul Chu and Lora Lam in Hong Kong and Edith Au Yeung in Tokyo.