Moody's: Asia Pacific Growth in Structured Finance Unstable

Moody's Investors Service says in a new report that despite the Australian, Japanese and Korean economies all heading towards weak but nonetheless positive growth in 2010, the performance of securitised loans in the region will continue to deteriorate until the end of 2010.


"In line with Moody's forecast of a slow economic recovery in the region, we believe that the limited but prolonged negative performance of underlying collateral will continue. This is particularly so with regard to residential mortgage-backed securities (RMBS) and asset-backed securities (ABS), which account for more then 60% of rated tranches in the region," says Keiko Sawada, a Moody's Group Credit Officer and author of the section of the report focusing on Asia Pacific.


"The performance of these sectors is affected to varying degrees by the unemployment rate which typically lags behind a recovery in economic growth, thereby making a recovery before 2011 unlikely. The impact on the credit quality of transactions in these sectors, however, should be limited, thanks to the structural features typical in these transactions," adds Sawada.


Despite strong corporate bond issuance since the beginning of this year and the solid erformance of Asia Pacific securitizations, market volume of securitisations in the region has declined significantly, although not as severely as global issuance.


"A recovery in issuance volume in the region is not foreseeable this year due to changes in funding strategies as well as investors' loss of confidence in securitizations," notes Sawada.
On the plus side, the region's banks -- which are major investors as well as issuers in the region -- have only limited impairments on their balance sheets, with the result that new transactions from local players have continued. In addition, strong asset quality and performance will allow the securitization market to recover more quickly than in other parts of the world.


Expected Structured Growth


Australian RMBS issuance was initially limited to those transactions sponsored by the Australian Office of Financial Management. Notwithstanding the three recent non-AOFM transactions, the majority of funding will likely continue to be bank paper which relies predominantly on government guarantees.


Over in Japan, despite ABS and RMBS markets contracting severely, particularly in the latter half of 2008, the country remains one of the few places where new securitization issuances is continuing (although at low levels) in all major ABS and RMBS asset types, without directly relying on a government or central bank program. In addition, the Japanese market -- which is heavily dependent on domestic institutional investors -- is seeing market sentiment beginning to improve, particularly since April.


Meanwhile, Korean transactions have primarily been targeted at single investors. One positive development was the initiation by a Korean bank of the first covered bond program in the Asia-Pacific region in the second quarter of 2009. Although costs were high, it demonstrated that issuers can tap a wider investor base, and we expect more issuances of cost-effective covered bonds to follow.


Notwithstanding the tight liquidity conditions in Singapore, CMBS transactions with expected maturity dates in 2009 have been refinanced successfully through bank loans, rights issuances or capital market issuances. We expect liquidity conditions to improve in 2010.


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