Introduction

While Hong Kong’s financial market is one of the most advanced and prosperous around the world, there is one type of offering that could further cement its status as Asia’s premier financial centre: securitisation. An introduction to some of the more mature securitisation markets around the world is given below, with a focus on the types of asset being securitised and the method for securitisation. Against this background, the way forward for Hong Kong to develop into a mature securitisation market is then analysed, with a particular focus on utilising an asset class that closely relates to infrastructure, construction and project finance in Hong Kong and possibly elsewhere in Asia.

Securitisation around the world

United States

The roots of the U.S. securitisation market can be traced back to the establishment of Fannie Mae in the 1930s, which planted the seed of mortgage-backed securities (“MBS”) in the U.S. which has blossomed ever since. The U.S. is currently the largest securitisation market globally, with approximately 2,415 billion USD in principal amount of securities issued in securitisation transactions during 2019.^[1] The major types of underlying assets of these securities are mortgages, automobile loans, credit default swaps (“CDS”) / collateralised loan obligations (“CLO”), equipment leases, credit card loans, and student loans. The most common method of executing a U.S. securitisation is to use special-purpose vehicles (“SPVs”) that issue securities to both retail and institutional investors. A single-SPV structure is common for collateralised debt obligations securitisations, whereas a double-SPV structure is common for consumer loans, automobile loans and equipment leases.

Japan

In 2018, there were at least 160 reported securitisation transactions with underlying assets located in Japan, with the aggregate issue price of the securities issued being approximately JPY 4.8 trillion (approximately 45 billion USD).^[2] The typical asset being securitised include residential and commercial MBS, CLO, lease and sales receivables, consumer and credit card loans, automobile loans and commercial bills. Unlike the U.S. or other common law jurisdictions, Japan utilises trusts as its go-to vehicle in securitisation transactions. In these arrangements, the settlor will convey the underlying assets to a trustee and acquire beneficial interests in the trust, and then sell such beneficial interests to investors.

Singapore

The securitisation market in Singapore is almost entirely private, apart from covered bonds which are listed on the Singapore Stock Exchange. Assets commonly securitised in this market are commercial and residential real estates, trade receivables and corporate loans. There are recently more activities in the field of project and infrastructure securitisation,^[3] as well as consumer and credit card loans^[4] in this market as well. In terms of the method of securitising the underlying assets, SPVs are used. The transfer of receivables to the SPVs are usually executed via assignment, which takes place in the form of a sale agreement between the originator and the SPV(s).

Hong Kong’s push as Asia’s securitisation hub

Securitisation in Hong Kong

Hong Kong‘s securitisation market is mostly private and typical participants are sophisticated institutional investors, as there is minimal participation from retail investors. Currently, the asset class being securitised in Hong Kong include mortgages, personal and consumer loan receivables, credit card receivables, and trade receivables, with a mix of the collateral being local Hong Kong assets and some being based in mainland China and East Asia. There were also securitisations of public assets as led by the government over a decade ago, such as the Hong Kong Link securitisation in 2004 that securitised revenue from five government-owned toll tunnels and roadway. Nonetheless, there was a lack of interest from retail investors in this type of offering, and it has now been over a decade since the Hong Kong government had rolled out any type of securitisation initiatives of public assets and infrastructure projects.

Is there investor appetite for securitised Hong Kong assets?

In a white paper recently published by the Asia-Pacific Structured Finance Association (the “White Paper”), it is argued that the lack of regular new issuance in Hong Kong assets has caused the Hong Kong retail market to lose familiarity with securitisations, making it difficult for the general investing public to not only understand but also become interested in classes of underlying assets that are rather novel to the Hong Kong market. For Hong Kong to become a securitisation hub, the White Paper points out that the government should regularly introduce securitisation projects in infrastructure, construction and project finance as a starting point. The market of Hong Kong is ripe for a push in securitisations in this area since retail investors are familiar with some of the assets used in these securitisations, with the most notable one being income from major infrastructure projects in the form of whole-business securitisations. Reference is again made to the 2004 Hong Kong Link securitisation, which offered steady yield to investors in the mid- to long term.

Another area to be explored in the Hong Kong securitisation space is trade receivables owed to construction suppliers in major capital works projects or real estate developments (for instance, those for equipment leasing and foundation works, to name a few). These trade receivables can be sold in securitisation transactions and generate short-term and immediate cash flow for these suppliers, which in turn allow them to improve their working capital and share risks associated with the project with the investors, whereas investors will have access to a quality class of assets that generate a steady flow of income.

Call for institutional reforms

Apart from rolling out programmes that securitise infrastructure and project assets, institutionally there are more to be done to make Hong Kong an attractive venue for securitisations of not just local but also foreign assets. The White Paper has recommended the introduction of a securitisation SPV regime largely similar to those in Luxembourg, Ireland, and the United Kingdom, with a specific legislation on securitisation alone to update and align the Hong Kong securitisation regime with leading common law securitisation jurisdictions. Another area of law that needs updating in order for securitisation to become more commonplace in Hong Kong is its conflict of law rules – one that focuses on the governing law of intangible assets rather than their illusory location is going to provide more certainty to securitisation transactions in Hong Kong.

Conclusion

The prospect of Hong Kong becoming a securitisation hub means bank capital is freed up and investors are connected to the infrastructure and project assets, as well as enterprises in this industry. In the best case, public and private companies will be able to access a deep pool of investor funds via avenues outside of the more conventional financing tools such as public listings and bank credit. It goes without saying that Hong Kong has the requisite human and institutional capital to become the new epicentre of securitisation in Asia, as reflected by Hong Kong’s liquid and diversified financial market, deep-rooted legal tradition, and modern dispute resolution regime. What however remains to complete the picture is governmental support in not only designing the right kind of infrastructure and project assets to kick-start a new wave of securitisation projects for investors, but also implementing various legal reforms that modernises Hong Kong’s securitisation law.