Flurry of synthetic credit deals expected from Malaysia banks

Malaysia's synthetic securitisation market is set for further growth, as a number of financial institutions are eyeing prospective deals. Although no new synthetic issuance has taken place since last May's inaugural 600 million ringgit ($188 million) issue by Malaysia's national mortgage corporation, Cagamas (see Asia Risk June 2007, 'Malaysia's CLO debut'), various deals are in the pipeline.

Rating Agency Malaysia (Ram) in Kuala Lumpur has received several enquiries relating to synthetic securitisation, says Kwee Siong Chong, general manager of structured finance ratings. "We expect at least one or two synthetic CLO (collateralised loan obligation) transactions to be issued this year," he says. "But the timing of issuance is hard to predict."

Cagamas is a candidate for the year's first issue. It is in talks with institutions to finalise details of its second deal. "Cagamas is working with several banks on the next deal and waiting for the most opportune time to issue," says Steven Choy, Cagamas chief executive.

The new transaction will again be a synthetic securitisation of loans to Malaysian small and medium-sized enterprises (SMEs). "We are concentrating on the SME sector for the time being, but the synthetic securitisation model can be applied to a range of asset classes," adds Choy. "We are working on the next step and developing synthetic securitisation techniques in other asset classes."

More financial institutions want to originate synthetic deals to share their credit risk with the capital market, says Sathasivan Kunchamboo, general manager at Credit Guarantee Corporation (CGC) in Kuala Lumpur. "We look forward to future deals with various partners and are currently in the midst of preliminary discussions with some partners on potential synthetic deals for SMEs," he adds.

Bankers say the Cagamas deal is an important benchmark for the market and note interest among Malaysian banks in issuing similar deals. CIMB was readying a synthetic balance-sheet SME CLO last year. Although press reports in March said the bank was looking to launch a CLO transaction, it is uncertain whether this will be the synthetic deal, as CIMB declined to comment.

From an originator's point of view, synthetic securitisation is a natural progression in securitisation, as not all originators require funding, says CGC's Kunchamboo. Synthetic securitisation would favour banks that are cash-rich and may want to improve their capital ratio, or the larger Malaysian banks that want to diversify their portfolio.

It is expected that by 2010, once new Basel II regulatory capital rules are implemented, there will be a rash of securitisation - both cash and synthetic. Most banks are expected to go for synthetic deals, as they may wish to keep the asset on their books, but sell only the credit risks for capital relief. "With Basel II, banks may become more sensitive to their capital position, and synthetic CLOs may serve as effective instruments," says Kunchamboo.

Given the ample liquidity in the Malaysian banking system, Ram's Chong says the benefit for banks of synthetically securitising their loan portfolios is compelling, from the perspective of both potential capital savings and risk management. "The main factors that will boost growth of synthetic securitisation," he adds, "are the size of potential capital relief and cost and availability of super-senior swap providers."

- Hardeep Dhillon.