What? Securitization? You mean creating those @#$@#% structured securities that are causing so much pain all around the world currently? I mean – look, AIG just took an $8B (pre-tax, post is $5.3B) loss – that’s about 10% of Bangladesh’s GDP! Imagine if 10% of Bangladesh’s annual production just went zoom zoom … [sorry - this week, indeed many recent weeks, were not kind to ppl in capital markets .... just letting off steam...]
Agreed now may not be the most opportune time to bring up securitization in polite conversation, at least not on Wall St or the City. But it used to, and will again in the future (no, I don’t think I am being naively optimistic here) serve a useful purpose in channeling funds, providing liquidity, and providing (appropriate levels of) leverage where needed.
Infrastructure development is an area where securitization techniques can and should be applied – and it seems like at least the Jamuna bridge securitization effort is ongoing (see recent Daily Star article for example). Also – note all the recent talk by Bangladesh Bank trying to get the banks to reduce the spread between deposit and lending rates (now ~6%) – clearly, alternate and cheaper funding sources can help industry as well.
A quick google search revealed Asset Securitization in Bangladesh: Practices and Impediments – a paper by three academics in Bangladesh. Quite a good summary of securitization in general, for those wishing an introduction. The paper, published early 2006, lists two securitizations done in BD till then – (1) Industrial Promotion and Development Company (IPDC) securitized Tk 359m of their debt receivables in Nov 04 and (2) IDLC securitized Tk 190m of their lease receivables in Feb 05. Both deals were done by ICB (quasi government investment company – see a description here), were in the form of zero coupon bonds (curious why – tax benefit?). The paper lists various impediments against the future development of securitizations (e.g. lack of legal framework, tax framework etc.). Paper also notes the lack of a developed government bond market – so no reliable yield curve for pricing structures.
If this Jamuna bridge securitization happens – whether it ends up being Tk 500cr (=Tk 5B) or Tk 200cr (=Tk 2B) – will completely dominate the size of the IDLC/IPDC deals noted above.
I know of at least two other securitizations of microfinance loans done in recent years. So – securitization has happened in BD and may represent an attractive opportunity in the future.
Look – we can at least go to all those unfortunate to have invested in sub-prime in recent years and say “I have a bridge I would like to sell you …..” 
March 3, 2008 at 3:57 am |
This bridge securitization seems like a nice idea. Problem is how do you re-insure these Toll Backed securities. We don’t have a functional bond market, forget about a credit default swap mechanism. Also as the recent Wall street and the City experiences prove these instruments and models themselves are not quite stress tested. In this case the securities will be sold to whom? retail investors? Institutionals? Local or foreign…or some mixture of both? Say for some reason, be it flood or seasonal variation or simple pilferage, the toll collected falls short of the projected models, what happens to the security valuations then? How can we ensure the liquidity of these instruments? Until the government revenue collection is strong enough….we don’t have the option of running to the government for a bail out or act as the ultimate guarantor through its revenue base [ Something you'll see soon...majority of these worthless private paper will be assumed as part of the endless national debt in the US to stop a run on banks]
March 10, 2008 at 6:58 pm |
Shadman –
You bring up several valid points. Let me try to address some of them.
1) Credit risk – In my opinion, investors will simply have to take on the credit risk of these instruments – I don’t think hedging is a possibility. Investors will, in turn, demand a risk premium. The difficulty will be in coming up with what one considers to be a fair price. Lack of a government yield curve will make pricing difficult. Market supply/demand will ultimately dictate the price at the end of the day.
Government may add an explicit guarantee (an implicit guarantee will likely be assumed by the market for these types of national level infrastructure projects) to help pricing / marketing / distribution. A credit rating for the country would help investors evaluate the value of that guarantee – and the credit rating would take into account the revenue base and other issues you bring up above.
Will a government guarantee be required to sell these instruments? We don’t know till we try… Seems like the two securitizations in the paper cited above did not carry government guarantees.
2) Liquidity – I don’t see how anyone can reliably ensure liquidity of these instruments. Investors will have to buy these intending to hold to maturity.
3) Investors – Both the securitizations mentioned in the paper cited were placed privately with various banks and NBFI’s (list of buyers in cited paper).
March 10, 2008 at 8:29 pm |
Tahsin,
As we have found out about the sub-prime debacle default risk cannot be priced in effectively. You may or may not know Bangladesh actually has not sought and thereby doesn’t have a credit rating internationally. One reason they haven’t sought it is to get LDC[Least Developed Country] aids and loans. and another reason is their weak revenue base. As you rightly pointed out there is no official yield curve as of yet. So there is no market tested basis for building a risk-free rate and any implied/explicit guarantee will be dodgy cause the ability to stand behind those guarantees are not there at this present time.
Under these circumstances pricing will be internal model based ala MBS/CLO. I believe given the paucity of risk appetite and capacity amongst international institutional investors one may be better served in creating an exchange traded security through a more traditional process as I have outlined above. One has to keep in mind…Wall Street can afford to put assets on tier III and sit on it for a little while. But if these are local banks, pension funds etc such lack of ready buyers for their holdings can mean having to hold these securities even when it doesn’t make economic sense [ say an inflationary situation with concommitant intrest rate hikes]. This will surely erode their capital base. Something to think about.