Wednesday, 19 December 2018

Securitisation 2005 - Asian fees sink lower

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The returns available for investment banks involved in Asian securitisation have fallen a long way in recent years, and the growing importance of local currency transactions means the fall in fees is set to continue. Matthew Davies looks at the extent of these developments.

Competition has never been more intense in the securitisation business in Asia ex-Japan and Australia. Over 15 international investment banks have ABS teams in the region, with something like 80 professionals working directly on the product. This excludes the numerous houses confined to their own domestic markets.

Not surprisingly, therefore, the fees on offer from ABS have fallen further in the last year or two from the already modest levels of earlier in the decade.

“Even in the early days, ABS was never that lucrative in Asia, but it is certainly getting worse,” said one ABS banker.

“ABS pays the returns of commercial paper with the work of an M&A deal,” added another. There may be a touch of hyperbole in that statement, but there is no doubt the gravy train has hit the buffers.

The all-in fees that banks receive from ABS transactions (including structuring fee, underwriting fee, etc) obviously vary from one deal to another, depending particularly on the novelty of each transaction. At the high end, bankers report that for a US dollar securitisation of a new asset class from a debut issuer they will ask for a fee of around 100bp, although most will be happy if they end up receiving 75bp or so. At 75bp, a US$200m deal would earn a return of US$1.5m.

Compared to straight bond deals, this looks attractive. However, to earn these levels, banks have to put in a minimum of four months of work – and in some cases, for example the early Taiwanese transactions, the process takes much longer.

Arrangers also need to price in a failure rate to account for the many deals that eat up many hours of work but never make it to market.

At the bottom end, cookie-cutter cross-border transactions pay as little as 10bp. A recent case in point was the latest Korea First Bank (KFB) MBS offer, a €500m (US$644m) MBIA-wrapped deal in March, that paid a fee in the region of 15bp. KFB, described by one ABS banker as a “fair payer”, argues a fee at that level is appropriate because most of the difficult work on its deals has already been done and any new tweaks will be done by KFB officials themselves. That may be so, but whether that kind of fee reflects the risks inherent in hard underwriting such deals so far ahead of close – as KFB insists its arrangers do – is another question.

One area where international banks can still make a decent return – at least in theory – is in the cross-currency swaps associated with such transactions. Here, returns are likely to be around 100bp or more, but once again, whether that accounts for the inherent risks is debateable. Take again KFB’s MBS transactions: the swaps written on those deals are risky and complicated, have 30-year lives (even if they will probably be unwound much earlier), and come with an enormous amount of transfer and convertibility risk that is difficult to hedge.

In such instances, the kind of rich pickings available from swaps a few years ago have largely disappeared, as issuers have become wiser about the tricks some banks have used to make millions of dollars extra, such as manipulating the prices to which swaps are referenced.

In future, however, the biggest threat to these now measly returns comes from the growing importance of domestic securitisation. Fees in local ABS markets are miniscule, with South Korean deals, for example, generically paying around 5bp. Even complicated transactions generate not much more than double or triple that, as witnessed by the less than 10bp fee on the recently mandated Thai government securitisation.

The situation may not be as bad in markets such as Taiwan or Malaysia, but they are still far from generous because local houses, now able to compete with the international banks for structuring roles, have such low cost bases.

All of which sparks the question: why do so many international banks have ABS teams in the region and which ones are making decent money? The answer seems to be that many banks feel that they need to offer a full range of products to their debt clients, including ABS. Another is that the product remains profitable if ABS teams are kept lean and their pay is relatively low.

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