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14 | ifr special report | June 2009 ASIA An emerging asset class


Emerging economies are developing an increasing number of financial instruments and covered bonds are no exception. Azerbaijan and Turkey are already one step ahead of Brazil, Croatia, Kyrgyz Republic and Mexico, which have also expressed a keen interest. Azerbaijan will become the


first former Soviet state to issue covered bonds, which will make it possible for Azeri banks to securitise their accumulated mortgage portfolios. The Republic's State Securities Committee registered a M55m (US$69m) covered bond prospectus from the Azerbaijan Mortgage Fund on May 29 2009. The AMF's covered bonds


US$125,000 on a US$5m ticket. South Korean insurers and pension funds, unable to subscribe to the deal in the primary, were jumping at the chance to book Double A assets, since there are no assets available of this credit quality in Korea. But this sharp tightening prompted rival bankers to proclaim the deal had been offered too generously. The leads cited the need to leave sufficient yield on the table, given the fact this was the product’s Asia debut. The deal amassed a staggering US$6bn book, a testament to the hard work educating investors about the deal’s structure on the road. US investors had been nervous, having seen BofA covered





will carry an annual rate of 3% with a seven-year tenor and will total more than the previously expected size of between M10m and M55m. The securities will be exempt from commission by the Baku Stock Exchange. "This step was taken in order to support the development of [the] mortgage bonds market,"


according to the BSE board of directors. The government of the


Caucasus country and the International Finance Corporation are very close to establishing a foundation for securitisation of the commercial real estate mortgage sector in Azerbaijan. The country is also working on a securitisation law.


The IFC and Azeri finance officials met in Baku in April to finalise work on the Bill on Covered Bonds, which the central bank has been drafting under IFC guidance since last May. Depending on market conditions, Azerbaijan may see securitisation deals of existing assets this year. Two years ago, mortgage lending from the AMF was suspended. Local banks now perform mortgage lending at their own expense. The mortgage portfolio in the Republic is estimated at about M300m, with a potential to rise to M1bn.


The IFC will also conduct due diligence on the Azeri banks' mortgage lending practices to


eliminate problems and prepare recommendations on further improvements. In 2007 Turkey took a major step towards the creation of a covered bond market by passing its eagerly-awaited covered bond law. It allows lenders to issue debt to back housing loans of 20 years or more and requires borrowers to pay a deposit equivalent to 25% of a property's value – the rest will be covered by the mortgage loan. Banks may levy a penalty of 2% of the loan amount if customers pay off the debt earlier than agreed. The Kyrgyz Republic and Armenia are among the other countries known to have been considering legislative amendments to make covered bonds and securitisations deals possible, with the former believed to be a bit further along in developing its legislation. Brazil had planned to create


a covered bond market in 2008 but the agenda was hijacked by financial circum- stances and FGCs came as a replacement.


Bakyt Azimkanov


paper skyrocket from Libor plus 30bp-odd launch levels to around the 350bp mark. Most investors were wary of stepping outside the sovereign/quasi-sovereign space. But a coterie of investors were convinced that a senior unsecured five- year from Kookmin would need to be priced at the mid-swaps plus 600bp mark, and therefore saw value for the structured product at 700bp – or even as high as 800bp.


Others were willing to value the deal against the outstanding quasi-sovereign Kexim and KDB five-year deals which were at around the plus 450bp while the deal roadshowed. They saw value in any pickup


ifre.com


Perhaps one of the deal’s more





impressive aspects was the bulk placement to asset managers, who ended up with 49% of the paper. And with 58% of the deal staying within the region, the stage looks set for more covered bond deals in Asia.


over these levels, particularly given the Double A rating on the paper – two notches above Korea’s sovereign rating. There was talk of including a US$200m three-year FRN into the deal. This was partly to offset the risk of early payment on the large number of the credit card receivables in the asset pool which would create a negative carry for Kookmin, which must place those funds on deposit at a low rate for the life of the bond.


Chunky reverse enquiry also motivated the pursuit of the FRN idea, but it ultimately fell away, prompting the floater plan to be dropped.


The leads were keen to stress the credit enhancement offered by the product, rather than marketing it as a pure rates instrument. Undoubtedly the generous collateral coverage made it a no brainer for accounts which would have been willing to book a senior unsecured Kookmin deal. Perhaps one of the deal’s more impressive aspects was the bulk placement to asset managers, who ended up with 49% of the paper. Private banks liked the high coupon as an alternative for their customers to bank deposits and took 19%. Banks booked 15% and insurers and pension funds 7%. And with 58% of the deal staying within the region, the stage looks set for more covered bond deals in Asia.





Sharp tightening prompted rival bankers to proclaim the deal had been offered too generously. The leads cited the need to leave sufficient yield on the table, given the fact this was the product’s Asia debut.


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