Devonshire Capital
December 6th 2002

PRESS RELEASE: Bangkok Post

NHA wraps up first securitisation deal

Investment bank sees more potential

Chiratas Nivatpumin

Devonshire Capital's Mr Hughes (left) and Mr Briones: ``Anything with predictable medium- to long-term cash flows can be securitised: leases, trade receivables, housing mortgages,'' Mr Hughes said. _ NIBHON KANANURAK

The National Housing Authority is set to complete Thailand's first asset-backed commercial paper deal, which will result in the issuing of 607.9 million baht worth of debuntures. Under the deal, put together by the investment bank Devonshire Capital, a special purpose company, NHA SPV, will issue the amortising debentures over a 10-year period. The bonds will be backed by hire-purchase receivables with a book value of 668.8 million baht. Oliver Hughes, head of corporate finance (debt products) at Devonshire Capital, said the agreement represented the first true Thai securitisation deal.

Bonds issued by NHA SPV will be purchased by another special purpose vehicle, Osprey Series I Co, which will finance the bond purchases through the issue of short-term debentures or commercial paper with terms of up to 270 days.

The assets will continue to be serviced by the NHA, which will also offer buyback support of up to 75% of the book value of the assets to cover defaulted receivables. A reserve and retention fund was also established to enhance ratings, assigned by Fitch at A+ (tha) for the NHA SPV bonds and F1 (tha) for the Osprey short-term paper programme.

Under securitisation, assets are sold by an originator to a special purpose vehicle. Bonds are issued by the SPV to cover the purchase of the assets. Revenues from the assets are passed on to bond holders to cover interest and principal payments.

For issuers, the benefit of securitisation is the ability to convert long-term cash flows from assets into immediate funds. Financial institutions securitising assets can also free up regulatory capital to finance new lending.

In Europe, securitisation deals are commonplace. However the immaturity of Thailand's debt markets has hampered the development of the securitisation market. Investors still rely primarily on the issuer's name, rather than asset quality in evaluating new debt issues, according to Mr Hughes. Securitisation deals, however, involved only the assets, without any name.

``Securitisation is not alchemy. You can't turn rubbish to gold. Many have looked for instance at ways to securitise non-performing loans. But it isn't easy,'' Mr Hughes said. ``Actually, anything with predictable medium- to long-term cash flows can be securitised: leases, trade receivables, housing mortgages.''

Whether entrepreneurs and businesses follow in the footsteps of rock star David Bowie and the Real Madrid football club, both of whom have used securitisation of future receivables to raise funds, will depend on if Thailand can remove impediments to the market's growth.

One such obstacle is asset quality. Local banks are still reluctant to sell off their performing assets for fear of increasing their non-performing loans. Plentiful liquidity has also removed incentives to sell assets to free up capital to extend new loans.

On the legal front, contradictions between the securities and bankruptcy laws mean that assets could potentially be seized from an SPV if the originator was declared bankrupt.

But Mr Hughes said authorities were making progress in addressing these issues, and expressed optimism that the market would continue to grow.

The deal with the NHA is a result of Devonshire Capital's plan to broaden its presence in the region. Stephen Briones, head of corporate finance (equity capital markets) for Devonshire Capital, said the firm planned to acquire a merchant banking licence in India as well as a tie-in with a Thai securities firm.