Singapore currently offers the most favorable conditions for the development of securitization in the Asia-Pacific region. The country has a highly regarded judicial process and a transparent legal system; a well-regulated banking system; and a long history of consumer lending, which includes auto loans, credit cards, and housing loans.
A key factor pushing securitization to the forefront in Singapore is the government’s wish to develop a healthy secondary local debt market. The new regulations, promulgated in September 1999, permit individuals to invest their pension funds in bonds with a minimum Standard & Poor’s rating of ‘A’. These regulations governing eligible investments for the Central Provident Fund (CPF), Singapore’s pension system, could further increase interest in rated securitized bonds (see Sidebar). The regulations increase the universe of eligible investments for CPF contributors and are advantageous for local issuers, creating a new class of investors with a natural appetite for Singapore dollar-denominated investments.
Central Provident Fund Investment Scheme (CPFIS)
Central Provident Fund Board
In September 1999, the Central Provident Fund (CPF) Board released a set of criteria for all existing and new bond issues to be included in the CPF Investment Scheme (CPFIS). Among others, the criteria include a minimum credit rating, listing on the Stock Exchange of Singapore, and denomination in Singapore dollars.
To qualify for inclusion in the CPFIS, new bond issuers must prepare prospectuses for the new issues and make them available to investors. In cases where bonds are exempt from the prospectus requirement, an information memorandum that sets out the terms of the issue, the risks of investing in the bonds, and other specifics must be made available to investors.
The published criteria are in line with the government’s efforts to develop the debt market. The requirement for credit ratings, in particular, will help CPF members to make informed investment decisions.
The criteria do not apply to bonds issued or guaranteed by the Singapore government. In addition, bonds issued by Statutory Boards are not required to comply with the criterion on minimum credit rating, as they are of relatively high quality.
Existing bonds approved for inclusion in the CPFIS already meet the criteria, except for the requirement of a minimum credit rating. The issuers of these bonds will be given six months—until Feb. 29, 2000—to have the bonds rated. Meanwhile, members may still use their CPF savings to buy these bonds. At the end of six months, unrated bonds or bonds that do not meet the minimum rating will be ineligible for the CPFIS. Members will then no longer be able to use CPF savings to buy the bonds. However, members who bought the bonds earlier will be able to either hold or sell them.
Although Singapore banks already have strong liquidity, there appears to be a growing desire to improve their already robust financial ratios. The prospect of increased global competition compels Singapore banks to improve their operating efficiency and to source lower-cost funding. Similar business and funding issues face Singapore corporations.
Recent statistics indicate that Singapore’s economy is recovering from negative growth. Retail sales, share indices, and property prices and purchases are all on the rise. Banks are competing fiercely on the basis of loan pricing to build up their mortgage loan portfolios, much like before the recession. Besides pricing, lenders are prepared to assume more risk, sometimes refinancing mortgage loans at 100% of the loan outstanding, regardless of the current market value.
Lower mortgage loan pricing increases pressure on banks to lower their cost of funding. On-balance-sheet debts are rated and priced in line with the rating on the bank. However, in a true securitization, the rating on the bank has no bearing on the rating on the securitized notes. Securitization benefits banks because they can effectively raise financing at the ‘AAA’ level, even though they may be rated lower than ‘AAA’. If the seller retains the servicing function, issuers will benefit not only by receiving fee income, but also from improved return on assets.
Rated securitized bonds offer diversification and greater choice for an individual’s CPF investment. Securitized bonds can be structured as revolving short, medium, or long-term instruments. Unlike corporate bonds, which are frequently issued on an unsecured basis, securitized bonds are backed by good collateral. Corporate bonds are subject to many external events such as mergers and acquisitions, regulatory changes, or other factors that affect the risk profile. On the other hand, securitized debt, such as mortgage-backed or asset-backed securities, factors in a predetermined risk or stress profile for a portfolio. A rated securitization ensures that the risks—credit, legal, or structural—are well covered. Consequently, rated securitized debt backed by a well-diversified portfolio, such as residential home loans or credit cards, is less vulnerable to rating changes.
Singapore has enjoyed very stable economic performance with steady GDP growth. Prior to the recent recession, the only other significant downturn occurred in 1985-1986. Banks and issuers may have difficulty retrieving or reconstructing information and records from the first recession. Without precise and reliable data covering numerous stress periods, transactions can still be rated, albeit with an added measure of conservatism. Where the situation warrants, Standard & Poor’s may rely more on recent information spanning the recession to formulate rating stresses. For Singapore, there are a number of reasons for using the more recent data:
Several major banks have indicated that Singapore’s mortgage portfolios, particularly those for owner-occupied properties, have generally performed well throughout the recession. This is partly because of the importance of home ownership in Asian cultures, which Standard & Poor’s has noted in Japan and Hong Kong. However, in Singapore, information on industrywide portfolio performance, such as write-offs or arrears for residential mortgages, auto loans, or credit cards incurred by all financial institutions or all nonbanks, is not publicly available. The availability of this information would help refine the rating criteria and establish a transparent and measurable benchmark. Such a benchmark can allow a potential issuer more adept at risk control and management to benefit from lower credit support in a rated transaction.
To date, there have not been any securitizations involving Singapore assets. Four unrated transactions have been completed, all of which are denominated in Singapore dollars. These structured notes are backed by commercial real estate, but are ultimately guaranteed by or have recourse to the sponsor or owner of the real estate. Therefore, the rating on such issues could not be higher than the rating on the sponsor or guarantor. The successful placement of and oversubscription for these pioneering transactions is a good indication that local investors are keen to invest in Singapore dollar-denominated structured bonds. These initial transactions can be considered a precursor to true securitization, which effectively delinks the risks of the seller from the risk of the assets. Based on other markets in Asia, as well as the U.S. market, rated securitizations involving residential mortgages, auto loans, or credit cards are sure to develop and flourish in Singapore.
Copyright 1999, Standard & Poor's Ratings Services
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