Securitization markets in Hong Kong

This page updated regularly deals with securitization developments in Hong Kong. If you have any news or development to contribute to this, please write to me.

During the heydays of Asian boom, Hong Kong led economic activity in the region. Obviously, therefore, Hong Kong is the center for securitization activity in Asia. A document of the Fitch IBCA estimates that in 1999, Hong Kong will contribute approximately 60% of all securitisation volume in Asia.

As one of the earliest instances of Asian securitization, securitisation in Hong Kong began in 1994 with the residential mortgage securitization for Bank of America. This was followed rapidly by other residential mortgage deals for Citibank, Cheung Kong and Standard Chartered Bank as well as a credit card transaction for Chase.

As the number of transactions in Hong Kong has increased, rating agencies, monoline insurers and investors have become increasingly comfortable with Hong Kong. In particular, the main concerns on mortgage securitization such as assignability, stamp duty and the requirements of the Land Registry have been thought through on a number of occasions and closing such deals has become a relatively well-trodden path. The return to China of Hong Kong in July of last year seems to have made little difference, and during the second half of last year a large number of residential mortgage transactions was being documented, some of which closed prior to the currency problems.

One of the important developments in mortgage securitisation in Hong Kong is the development of the Hong Kong Mortgage Corporation (HKMC) (set up in March 1997), which is the equivalent of Fannie Mae, which has recently (Nov. 1997) begun to acquire its first pools of residential mortgages. The portfolio of mortgages held by the Corporation was HK$11.39 billion as of December 1998. However, the potential for securitisation of mortgage funding in Hong Kong can be judged by the fact that this amount represents only 2.48% of the outstanding mortgage loans in Hong Kong.

HKMC has already begun its operations. In October 1999, HKMC listed seven already issued MBSs and a new bond-issuing program of HK$20 billion on the Hong Kong Stock Exchange to enhance the liquidity of MBSs. The MBS market will grow in Hong Kong as Hong Kong banks’ mortgage loans stand at about 30% of total exposure on average - securitization can be used to bring down the exposure already being objected to by bank regulators, particularly after the 1997 crisis.

Hong Kong is probably the most securitization-friendly jurisdiction in Asia. The legal system is based in general terms on English Law (with familiar concepts, eg, equitable/legal assignment)

making it quite straight-forward to structure "true sale" transactions from a legal, regulatory and accounting perspective. The legal framework, in particular bankruptcy law, is well developed, with a mixture of legislation and case law. Most securitisation transactions in Hong Kong follow the "equitable assignment" route, without giving a notice to the obligors. Registration of equitable assignments is not insisted upon. However, transfer of mortgages would require registration with the Land Registry offices.

The regulatory environment is sophisticated, with a set of guidelines for regulatory off-balance sheet treatment for regulated institutions. These guidelines, issued by the Hong Kong Monetary Authority in 1995, revised in 1997, largely follow the Bank of England model. These guidelines put in certain conditions subject to which a securitisation can give a capital relief to the originator bank. Some of the prominent conditions are : (a) transfer of the receivables to an unrelated party; (b) no right or obligation to buyback; (c) no recourse. The provision of credit enhancement by buying subordinated debt of the SPV would be directly deducted from the capital of the bank being a direct credit substitute.

Unlike virtually in every other Asian country, in Hong Kong there is no withholding tax on interest payments to a non-resident, making the securitization off-shore of interest-bearing receivables much simpler.

Stamp duties, generally a major irritant for securitisation transactions, is not applicable on equitable assignments. However, transfer of mortgages would be treated as transfer of interests in land, and would attract duty @ 2.75%.

A typicality of Hong Kong's Income -tax law (Inland Revenue Ordinance) is that the obligors whose payables have been securitised may not be able to claim a deduction for the interest being paid by them unless the interest qualifies under sec. 16 (2) of the Ordinance. One of the alternative conditions in the Ordinance is that the recipient of such interest should be liable to tax in Hong Kong. Thus, the SPV, even if it is incorporated in an off-shore location, would have to come forth for taxation in Hong Kong. This leads to a necessary double taxation on the residuary income of the originator, since the SPV being taxed in Hong Kong can only claim a deduction for the interest being paid by it.

Hong Kong does not have any Value-added tax.

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