Affin Bank's CLO
Prof. Ian H. Giddy, New York University
CLO sets standard for Malaysian ABS market
Affin Bank, using Nomura Advisory Services as technical advisor, recently closed Malaysia's largest domestic securitization to date with a M$1 billion ($263.1 million) primary collateralised loan obligation (CLO).
Bankers involved on the transaction claim that it is the first CLO globally to securitize a portfolio of new loans.
The transaction is backed by loans of between M$25 million to M$45 million originated by Affin to 25 listed companies, offering them the chance to tap capital market investors rather than depend purely on commercial loans. The companies come from 16 industry sectors with ratings ranging from BBB to AAA.
Nomura, which does not have a licence to sell securities in Malaysia, was brought in by Affin to help design the structure for the deal. Essentially, Affin sells the loans to a special purpose vehicle - called Aegis One Bhd - which repackages the loans into M$900 million of senior notes - rated AAA by Malaysian Rating Corp - and M$100 million of unrated subordinated bonds. Both tranches have five-year bullet maturities, with repayment on a semi-annual basis.
The senior bonds carry a fixed rate coupon of 5.2%, a significant pick-up on the current 3.995% average pick-up for triple-A rated five-year corporate bonds, as calculated by Bank Negara. The subordinated notes were priced on more of an equity basis, with the coupon depending on the credit rating of the underlying companies.
A banker close to the deal says that both tranches were fully placed, with interest mainly coming from banks and fund managers. He added that the generous yields were essential to the success of the deal, given that there have been so few securitizations seen in Malaysia.
"5.2% is a very high yield for triple-A paper in the local market, while investors can also get double digit returns on the sub piece," the banker says. "It is important in new transactions to give investors this kind of premium - otherwise they won't see the comparable value. You can think about pricing tighter once investors have seen two or three deals and got used to the structure. But what I do think is important to emphasize here is that this was a big deal for the domestic market, which highlights that the appetite for securitization is there if the yields are."
The banker adds that this transaction differs from what has gone before by being specific about the obligors. "Basically, we went around getting feedback from investors on what they didn't like about the previous deals," he says. "One thing that they did not want to see was the kind of black box guidelines where all investors knew about the deal was a general outline about the structure, but no specific details about the obligors. This transaction is 100% transparent - the 25 borrowers are named up front and investors can go to the deal trustee at any time to see exactly what is in the pool."
That is different from one of the other Malaysian CLOs, the M$310 deal launched in November 2001 by Danaharta, the state-owned asset management company. Danaharta's deal, arranged by Deutsche and issued through the Securita ABS One SPV, was backed by a portfolio of rehabilitated loans, over half of which were property-related.
The triple-A rated five-year offering received criticism in some quarters for not giving enough details about the property loans included. Some investors shied away from the deal, as it was felt the 4% coupon was not generous enough compensation for the lack of information on the underlying portfolio.
Danaharta, the state-owned Malaysian asset management company (AMC) set up in 1998 to clean up the non-performing loans problem faced by financial institutions, has launched its long awaited first asset-backed securitization in a M$310 million ($81.6 million) deal. Alliance Merchant Bank and Deutsche Bank acted as joint lead managers on the transaction.
The two banks were mandated in June, with Deutsche fending off rival bids from Credit Suisse First Boston and Merrill Lynch to win the international advisory position.
One rumour currently doing the rounds is that Deutsche took a significantly reduced fee to guarantee its involvement on the deal. However, it is more likely that Danaharta was swayed by Deutsche's involvement on last year's successful $367 million international offering by Kamco, the Korean equivalent of Danaharta.
That deal, which was jointly handled by UBS Warburg, was the first Asian cross border deal to be backed by non-performing loans and scooped FinanceAsia's best asset backed deal award.
Danaharta is widely expected to follow Kamco into the international market at some point next year, and a successful domestic debut would put Deutsche in prime-position to get that mandate as well.
Danaharta's deal, a collateralized loan obligation (CLO) launched through the Securita ABS One special purpose vehicle, is backed by a portfolio of M$570 million rehabilitated loans that have been performing for an average of 17 months. Of these loans, around 60% come from the property sector.
Rating Agency Malaysia has rated the M$310 million senior notes triple-A. These, which will price by December 10, have a maturity of five years and will pay a nominal coupon of 4%.
These bonds will be placed privately through a bookbuilding process, according to officials at both leads.
In addition, Danaharta will also hold M$284 million of subordinated bonds, the equivalent of 45% credit enhancement to the senior notes.
Although some hoped that the initial deal would be bigger: the issuer has rehabilitated some M$2.3 billion of loans that have performed for over a year, Encik Hafiz, managing director of Danaharta, says this was to be expected for a first offering
"This is the first, but certainly not the only issue of asset-backed securities by Danaharta," he says. "This issue is not a large one. But, the idea is to initiate the securitization process this year and develop our knowledge and skills, while testing the market's appetite for such securities."
Some might suggest that Danaharta has been wise to proceed with caution and to offer a generous coupon, as it is believed that Malaysian investors are not overly enamored by ABS paper.
Although it very much early days - The Securities Commission only launched its guidelines for ABS issuance in April - there have been suggestions that the first domestic deal to emerge from Malaysia was not an overwhelming success.
In September, Arab-Malaysian Merchant Bank, launched a M$255 million collateralized bond obligation (CBO) through the Prisma Assets SPV. RAM rated the M$225 million senior notes triple-A, but some sources suggest the deal was extremely tough to place because of investor skepticism.
"I think there's a feeling that Malaysian investors are finding securitization extremely challenging and it has been difficult to generate enthusiasm," comments one banker from Kuala Lumpur. "They can buy Malaysian government securities and triple-A corporate paper, investments they understand fully."
In light of this, the banker feels that the leads have taken a sensible approach in pricing the paper. "4% is a wide coupon for five-year triple-A paper, considering you could get Telekom Malaysia for 3.5% and five-year government paper is being quoted at around 3%, the banker adds. "The underlying portfolio is also heavily skewed to property and investors want less exposure to that at the moment. The deal has been priced to sell and I think you have to be generous at this stage to get the market going."