The Central Bank of Taiwan has finally submitted a draft securitization law to the Ministry of Finance (MoF). The MoF will look at the proposals over the next fortnight, and if it gives its approval the draft law could be incorporated into the Legislative Yuan as early as September 18.
To help with its decision, the Ministry has invited opinions from the asset backed securities (ABS) teams of a number of foreign investment banks. It is believed that SG has been chosen in a formal capacity to work with the MoF in a special advisory role.
The draft had been expected at the end of the June, but was pushed back as the government focused its attentions on more pressing concerns such as rising unemployment, diplomatic tensions with China and a general election at the end of the year.
Enough pressure has been exerted to put securitization back on the agenda, however, and the details that have emerged suggest that Taiwan wishes to use Japanese legislation as a model for its own guidelines.
The draft law proposes that two different entities be allowed to securitize assets in line with common international standards: special purpose vehicles (SPV) incorporated under the Company Law and special purpose trusts (SPT) which could be created under the Trust Enterprise Law.
Additionally, the law includes the criteria for credit ratings and the level of credit enhancement needed to be structured into any deal. It also states that any publicly offered transaction will first need the approval of the Securities and Futures Commission.
Foreign bankers, while encouraged that the Taiwanese authorities seem to be keen on securitization at long last, still have to convince the MoF on various tax issues that would act as a major impediment to the development of ABS in Taiwan.
The first problem concerns whether ABS deals will be subjected to the 0.1% transaction tax that is levied on all corporate bond deals. Secondly, it has not yet been clarified whether the transfer of assets to SPVs or SPTs will be exempt from income tax, business tax and deed tax.
Tax breaks are generally considered to be one of the major advantages to securitization and although the MoF has said it will consider putting these in place, how much credence can be given to this is open to debate.
The 0.1% transaction tax has long been the bane of debt capital markets players, and the scrapping of it has seemingly been on the MoF's agenda for some time, but nothing has been done to remove it.
One Western banker is not too convinced that the draft securitization law addresses this issue, but nonetheless remains hopeful. "If the ministry wants to smooth the path towards securitization, there are quite of lot things that need to be addressed, including the unfriendly tax issues," the banker says. "The authorities seem to want to develop the market but this will be a good test of how willing they are to cooperate."
Much work remains to be done before anyone can speculate on who will become potential issuers and what asset classes will be securitized. The MoF has previously mentioned mortgages, credit card revenues, auto loans and consumer loans as likely assets and it is also believed that the government would like to use securitization as part of its scheme to lower non-performing loans in the country. These currently account for 12% of all loans in Taiwan.
