Taiwan ABS market off to a quick start

Taiwan’s asset-backed securities market has kicked into life following the launch of a NT$3.59 billion ($104 million) collateralised loan obligation (CLO) from the Industrial Bank of Taiwan (IBT) in February. And more deals are expected in quick succession, with the country’s first primary collateralised bond obligation (CBO) expected to close at the time of press.

IBT’s CLO was backed by 41 loans extended by IBT to 23 borrowers. The deal comprised NT$2.77 billion of senior trust certificates carrying a coupon of 2.8%, and a subordinated tranche worth NT$827 million. The senior certificates were privately placed and the subordinated tranche was kept by IBT. The transaction was arranged by SG, the investment banking unit of French bank Société Générale.

Hot on its heels, Taiwan’s International Commercial Bank of China (ICBC) and research house Insight Pacific, and Hong Kong-based investment manager ADM Securities and independent investment banking firm Asian Capital Partners, are co-arranging the country’s first offshore primary CBO, worth nearly $170 million.

The issuer is TMBF One, a special-purpose vehicle registered in the Cayman Islands for the purpose of the deal. As part of the transaction, 17 small to medium-sized Taiwanese firms will issue US dollar-denominated zero-coupon convertible Eurobonds to be purchased by TMBF One. At the same time, TMBF One will issue three classes of three-year notes backed by the convertible bonds.

The driving force behind the transaction is “the convergence of investor interest in Taiwan’s small cap companies, and a desire of Taiwan’s government and main financial institutions to support small and medium-sized companies”, says Andrew Korner, Hong Kong-based chief executive of Asian Capital Partners.

The floating-rate class A notes, with an expected size of $133 million, have received a prospective A rating by Standard & Poor’s, thanks to a guarantee from ICBC. The class B senior preference shares, to be placed by ICBC, are expected to be worth about $16 million and the class C junior preference shares, to be placed by the co-arrangers, are expected to be worth between $18 million and $20 million. Neither preference shares pay a coupon but investors receive a premium upon maturity.

The convertible bonds mature in March 2008, but they also have a put option after three years to match the maturity of the notes. After three years, the convertible bonds are expected to be converted into shares. By doing so and because the convertible bonds don’t pay out any interest given the zero coupon, TMBF One isn’t liable to Taiwan’s withholding tax.

And further deals are expected out of Taiwan in the coming months. Chinatrust Commercial Bank mandated Lehman Brothers last September to issue a mortgage-backed security (MBS); First Commercial Bank has mandated Deutsche Bank to structure an MBS; and Sinopac is also thought to be looking at issuing an MBS transaction. Cosmos Bank, meanwhile, has mandated Hypovereinsbank for a deal backed by consumer loans. MT