Securitization markets in Thailand

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

When the first Thai securitisation transaction took place in the autumn of 1996, of the Thai Cars auto receivables securitization for TISCO, no one thought of the financial mess that Thailand was in. The Asian crisis took bottoms out of the Thai financial market with demise of most of the finance companies and a number of financial intermediaries.

Securitisation by regulated financial intermediaries (including banks, finance companies, credit companies and securities companies) in Thailand was prohibited by the Bank of Thailand. Hence, till recently, the securitisation market was not accessible to entities other than those that were not under the regulatory umbrella of the Bank of Thailand, such as leasing companies or hire-purchase companies. This explains why most of the Thai securitisation transactions have been so far by leasing companies.

Alternatively, securitisation transactions could be structured as secured loans. This led to the deal being structured as a loan to the originators by a Thai SPV secured by an assignment of the lease and hire purchase receivables, the Thai SPV financing itself by a loan from an off-shore SPV

However, with the passage of the Securitisation Law, securitisation has now been permitted for financial intermediaries too.

Recently, the Thai Government enacted a long-awaited securitization law called Specific Juristic Person for Securitization Enactment - see full text on our securitisation laws section. The law primarily has the following features:

• The law defines securitisation, assets that can be securitised, etc. The regulation of securitisation transactions has been handed over to the Securities and Exchange Commission (SEC). The law clarifies that the business of the SPV was not a finance or credit foncier business, which would have required a licence.
• Entities that can benefit from the law include commercial banks, finance companies, credit fonciers, securities companies, etc.
• Conduct of securitisation transaction would require the approval of the SPV by the SEC.
• One of the most important effects of the new law is that it overcomes a basic problem of Thai law, discussed below, that requires an assignment of a debt to be backed by notice to the debtor. The present law eliminates the notification requirement, if the originator is also the collector.
• Another very important impact of the new law is that the transfer of assets from the originator to the SPV, if the assets are backed by mortgage, pledge or guarantee, will be exempt from tax on transfer. Thus, the VAT problem, discussed below, is resolved as far as mortgage-securitisations or other asset-backed securitisations are concerned.
• Again, one of the problem areas in Thai securitisation was the possible annulment of the transfer of assets upon the bankruptcy of the originator. The source of the problem was Sec. 114 of Thai Bankruptcy Code. This problem is resolved by making the Bankruptcy Code inapplicable in case there is a qualifying transfer of assets from the Originator to the SPV. In order for the transfer to qualify, the following are the conditions: (a) the transaction is done at fair market values; (b) the risks and rewards in the assets are transferred to the SPV; and (c) the collaterals backing up the assets are also transferred to the SPV.

Though the implementation of the securitization law has resolved a number of problems inherent in Thai law, the problems remain, in cases where the law does not apply. For example, lease transactions may not be covered by the provision which exempts the VAT application to transfer of assets. This apart, the law applies only to securitisation by financial entities.

Outside of the securitisation law, a securitisation transaction in Thailand is fraught with many problems - to begin with, the very concept of trust is alien to Thai law, which is different from the English common law system and closer to Civil Law. Assignment of receivables not only requires notification to the debtor, in fact, sec. 306 of the Civil Code provides for a prior sanction of the debtor in order to lawfully assign a receivable, unless the notice of assignment has been served in a proper manner. Registered post is considered as a proper mode of servicing the notice.

Since the Thai law does not recognise trusts, there are legal issues relating to comingling of cashflows where the originator also acts as the servicer.

There two taxes that affect a securitisation deal in Thailand: the Value-added Tax (VAT) and the Specific Business Tax (SBT).

VAT leads to a 10% levy on all sale of goods and services. The definition of "goods" is wide enough to cover incorporeal rights having value: therefore transfer of receivables under securitisation transactions are easily trapped by the definition.

As noted earlier, the applicability of this tax is exempted on transactions covered by the securitisation law. However, transactions not exempted will be hit, and the tax would really make a transaction unworkable, since the the VAT paid at the time of transfer will be irrecoverable. Irrecoverable, since the SPV, being the transferee, cannot claim such tax as any setoff anywhere.

To circumvent this problem, some of the Thai securitisations in the past were structured as loans: that is, the assignment of the receivables from the originator was taken as a collateral to secure a loan. This solution, obviously, kills the very purpose of securitisation which is to isolate the assets from the originator and achieve predominant rights therein with the investors rather than the originator.

Another tax, applicable on specific businesses, is the Specific Business Tax (SBT) : the scheme of the revenue is that on specific businesses, VAT would not apply, and SBT will. SBT is applicable on financial businesses such as banking, finance companies, credit fonciers, etc. The levy is 3% of the receipt by way of interest, discount, etc.

In case of securitisations by financial entities, it is felt that this levy apply rather than VAT, and the impact of this levy is far lesser than that of VAT. SBT is applicable, in case of securitisation, on the profit from the transfer of receivables, that is, the difference between the discounting rate and the inherent rate of return in the portfolio. This tax can be staggered by transferring the receivables at their inherent rate of return, and extracting profit later by way of either servicing charges (in which case the income may suffer VAT rather than SBT!) or residuary income. However, the tax is only deferred, not avoided.

Withholding tax is applicable to interest payments to individual investors, exempt in case of corporate investors.

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