SA investors' love affair with securitisation continued when BMW Finance's R3bn issue ended up being four-times oversubscribed at the end of August and the paper was issued at a narrower spread over similar-dated government stock.
Part of the reason for the favourable reception was that the issue received the highest possible AAA rating from Moody's and benefited from being a respected issuer.
After a slow take-off, banks and institutional investors have embraced securitisation during the past two years because they recognise it as an attractive and efficient funding alternative to raising money on the equity market or borrowing it from banks.
Securitisation involves a bank or a company selling off its financial assets so they can be repackaged into a separate financial structure. The bonds issued to buy the assets can be split into different tranches and are subject to credit enhancement techniques that often see the investment achieve a higher credit rating than the underlying company that manages the assets. The new-look assets are then sold to investors who expect to make returns on the performance of the underlying assets.
During the past two years, about R20bn has been securitised in SA and the market is expected to continue to grow at a fast pace for the next 12 months.
The SA securitisation market has not only been quick to take off but its growth path has differed from the way the developed securitisation markets in the US and Europe initially grew.
Moody's SA head Reynold Leegerstee says most of the early securitisation issues in Europe were residential mortgage-backed securities (RMBS). In contrast, in SA there have been only two issuers of mortgage-backed securities and three securitisation issues - SA Home Loans' Thekwini I and II issues and Investec's R1bn "Private Mortgages" issue.
Leegerstee believes SA has followed a different growth path because it has the benefit of starting slightly later than the more established securitisation markets. "The issuers have been able to refer to the work done on other asset classes in other markets.
"If you have a sophisticated originating team, it's relatively easy to copy the technology and adjust where necessary to reflect the local market and legal framework."
He points out another atypical feature of the development in SA's securitisation market is that there haven't been any commercial mortgage backed securitisations (CMBS), though these have been the dominant asset class in the more developed securitisation markets. CMBSs involve the securitisation of real-estate assets such as office buildings and warehouses.
Leegerstee expects further RMBS issuance this year and CMBS could add to a quickly diversifying SA securitisation market.
Standard Corporate & Merchant Bank director securitisation Aidan-John Rothman expects both corporates and banks to be active issuers in the local securitisation market during the next six to 12 months.
He says some banks have exhausted their capacity to issue tier-two capital and "the next place they will look for funding will be in the securitisation arena". But he says, "banks are reluctant to give up headline earnings so there will need to be some price compression on spreads before it becomes really attractive for banks to fund themselves through securitisation."
There have been only a few large corporate securitisation issues because most of the big corporates are able to secure bank funding at attractive lending rates. But after a succession of corporate failures in the late 1990s, the authorities acknowledge that corporate lending risk is concentrated on the banking sector. They recognise the need to encourage the development of securitisation because it moves some of that risk to the broader capital market.
Regulatory environment
Rand Merchant Bank's Grant Scott says the SA securitisation industry is still new. He says the main catalyst to its development was the formalising of the securitisation notice in December 2001.
Also, SA banks don't always accurately price the credit risk associated with lending to a corporate, he says. "In particular, the lower-rated borrowers are charged credit margins that are insufficient to cover the credit risk. These returns are subsidised to an extent by fees earned on banking transactions. The relatively low credit margins mean corporates do not find it attractive to raise funding in the capital market."
He says once the Basel 2 capital requirements are finalised, banks' regulatory capital requirements against loans to lower-rated corporates may significantly "increase the cost of capital of these loans". He believes less credit- worthy corporates will be able to reduce their funding costs by securitising assets and obtaining a credit rating on assets that is better than the credit rating of the company itself.
Futuregrowth credit manager Marshall Brown says the advantages that securitisation vehicles offer institutional investors are diversification, reduced volatility and a yield sweetener. "The trade-off is reduced liquidity."
Most investors in securitisation issues tend to be buy-and-hold investors and there's little secondary trade in the paper. But that is a characteristic shared by even European and US securitisation markets and is unlikely to change overnight.
Synthetic securitisations
It didn't take long for the local market to discover the benefits of synthetic securitisations.
In a synthetic securitisation, the issuer sells the risk, but not the underlying assets, to investors.
Mettle debt division head David Hurwitz says it's often difficult or costly to transfer the underlying assets, for instance if the assets were property, transfer fees would be incurred. "In this case, you would use a synthetic structure so you would not engage in a transaction, but pass the risk on to other investors and keep control of the assets."
RMB arranged the biggest synthetic securitisation, the R12,5bn FirstRand Enhanced Synthetic Credit Obligation (Fresco) issue, last year.
Scott describes synthetic securitisations as "selling the economic rights of the performance of those assets to the special purpose vehicle" and expects revised government regulations this year to have a positive effect on the growth of synthetic securitisations.
The expectation is that there will be an increase in capital requirement against BB-rated tranches and liquidity facilities in the revised regulations.
But it is not expected to dampen the appetite for investment-grade securitisation issues and several large issues are due to come to market, including SA Home Loan's third Thekwini issue, before the end of the year.
SA Home Loans is the only repeat issuer in the domestic securitisation market and the way the different issues are greeted by the investment community indicates how the market is developing.
SA Home Loans CEO Simon Stockley is going on a road show in September to raise anything between R500m and R2,5bn and hopes to close the issue after the Monetary Policy Committee has met in October. It raised about R1bn on the two previous occasions it went to the market for funding and Stockley is confident he'll again be received favourably by investors.
Smaller securitisations
Specialised finance house Mettle has developed a niche for itself at the smaller end of the market. In August the company concluded a securitisation that packaged the R50m debtors' book of human resources group Workforce. Nedbank was the sole investor in the issue.
Hurwitz says the average size of the securitisation deals Mettle has been involved in has ranged from R50m to R300m. The group has conducted nearly a deal per month this year, he says, but the market doesn't see all of them because they are "niched and exotic" issues.
He says the banks do "very large, very infrequent issues" and it is Mettle's intention to "concentrate on stimulating the market at the other end".
But there is debate about the economics of smaller deals because members of the bank securitisation departments don't believe it is cost-effective to do a deal smaller than R500m.
Scott says: "A securitisation has a price at a fixed level, including the legal costs, the rating agency's fees and the time involved in putting the deal together. That cost has to be amortised into the total cost of funding. Smaller deals don't make sense."
Commercial paper conduits
Three of the big four banks have set up commercial paper conduits to assist the securitisation of smaller issues without having to incur the expensive set-up costs.
Standard Corporate & Merchant Bank paved the way with its Blue Titanium conduit launched last year, and Absa followed with its Abacas and RMB with its Indwa transactions. These conduits have a combined capacity to invest in assets worth R50bn, with only about R5bn invested in underlying securitised assets so far.
The conduits open up a new investor base because they offer shorter-dated paper that matures in up to a year.
"They are equivalent to cash or near-cash and can be used in money market funds," says Investec Treasury & Specialised Finance's Simon Howie.
Rothman says the conduits perform a number of functions. They convert term transactions into instruments that can then be funded through the money market. Investors also buy commercial paper from the conduit because it trades at a premium to similar-dated money market paper.
