Industrial opens tap on asset-backed bond sales

The Industrial Bank of Taiwan (台灣工銀) completed the sale of the nation's first asset-backed bonds, opening the way for at least NT$15 billion (US$431 million) of similar securities as lenders seek to cut bad debts.

The NT$3.59 billion collateralized loan obligation, a bond backed by 41 corporate credits, follows the introduction of regulations in the middle of last year allowing the securitization of financial assets. Rivals of the nation's second-largest non-commercial lender plan to follow suit.

Asset-backed securities allow lenders to move assets from their books, freeing capital they would otherwise set aside against the risk of loans souring.

Selling asset-backed securities "will allow banks to improve their capital-adequacy ratios," said Jesse Wang, a bank analyst at ABN Amro Holding NV in Taiwan.

The average capital adequacy ratio stood at 10.2 percent as of June last year, according to the central bank.

"That's unadjusted for disposal of non-performing loans," Wang said.

"Recognition of the loan losses will bring the overall industry ratio to below 8 percent," which is the minimum set by the Bank for International Settlements, she said.

Societe Generale advised Industrial Bank on the structure of the sale. The bonds were split into two lots -- a so-called senior portion, making up almost four-fifths of the total, paying a coupon of 2.8 percent and rated twA by Standard & Poor's unit Taiwan Ratings Corp (中華信評).

Full repayment is expected to be completed in three years and seven months.

Industrial Bank took up the remaining so-called junior portion, which absorbs the first losses from any defaults on the underlying loans.

"The risks are diversified as each loan does not exceed NT$100 million, so, even if a default occurs, it's in control," said Mark Hu, a fixed-income dealer who evaluated the sale at the treasury department of United World Chinese Commercial Bank (世華銀行), one of the investors.

Banks are counting on demand for assets paying yields higher than government bonds or fixed deposits.

"Some of our money is in deposits, where the interest rate is quite low. So, taking some of that out to buy asset-backed securities will help increase returns," said Kenny Kwang, who helps manage the NT$60.3 billion of equities and fixed-income assets at MassMutual Mercuries Life Insurance Co.

First Commercial Bank (第一銀行), Taishin International Bank (台新銀行) and Chinatrust Commercial Bank (中國信託商銀) are each planning NT$5 billion sales of debt backed by home loans in the first half of this year.

Passage of the Financial Asset Securitization Law (金融資產證券化條例) last year allows for the repackaging of assets such as residential mortgages, car loans and credit-card receivables.

The Ministry of Finance approved the Industrial Bank sale last month.

"Banks' initial sales will be backed by higher-quality assets, giving investors a stronger protection," said Chang Yi-hsiung (張義雄), First Commercial's executive vice president.

Chinatrust Commercial expects to be able to complete a sale of NT$5 billion of debt backed by home loans within a couple of months after asking for approval from the regulator as early as next month, said Huang Szu-kuo (黃思國), executive vice president of the company's wealth management group.

Taishin International also plans to sell NT$5 billion of bonds backed by mortgages by June, said Sarita Hao (郝名媛), the bank's representative. Taishin International is the second-largest credit-card issuer.