Many Thais may be unfamiliar with securitised bonds but in the near future the financial instruments will play a more important role in the economy. So, let's get to know this concept because the more you know, the more you will benefit.Conceptually, securitisation is a financial technique that pools assets and, in effect, turns them into a tradeable security based on their value.

Financial institutions, businesses of all kinds and governments can use securitisation to immediately realise the value of cash-producing assets on the promise of their future ability to generate income.

Securitisation requires two parties - the issue and the investors - as well as a special purpose vehicle (SPV), essentially an entity to created as a steward of the bond.

The issuer benefits from raising funds through securitisation, as it is an investment alternative with assets whose credit quality can be specified.

It is essentially yet another type of asset- and liability-matching instrument.

Dhanarak Asset Development Co Ltd (DAD) earlier securitised future rent proceeds from a yet-to-be-developed government complex.

With the government expected to spend more than Bt450 billion on infrastructure mega-projects in the next four or five years, the Finance Ministry-owned DAD began securitising Bt24 billion worth of future government-office rents.

Are securitised debentures better than ordinary debentures?

Structurally, the two types of debentures are different.

Ordinary debentures are promissory notes or bonds sold by a corporation to investors and interest is generally paid on a monthly basis

The repayment is backed only by the general creditworthiness of the corporation and not by a mortgage or a lien on any specific property.

Securitisation debentures are issued via SPVs. The SPV is usually a subsidiary of the issuer with an asset/liability structure and legal status that makes its obligations secured even if the parent company goes bankrupt.

The asset is clearly separated from the original owner and it generates income that is not based on the issuer's performance.

That enables the SPV to generally receive a higher credit rating than the company that owns the asset being securitised.

And that means that the company can borrow money at cheaper rates than floating bonds based on its own credit rating.

The SPV is also the administrator of the debenture. It acts as the representative for debenture-holders and well as the asset custodian. SPV will also work on the debenture's ratings and audits.

Assets that can be securitised includes mortgage loans, credit-card loans, car loans, property rental income, and educational loans.

If the investors want to invest in securitised debentures, they should make sure that:

l The issuer provides an estimate on the expected future income generated by the asset;

l The bond can be sold separately with no effect on the asset owner's performance;

l The asset is "free from pledge";

l The asset owner has a good record of repaying its creditors; and

l The asset owner's debt-default ratio is low.

Investing in securitisations in the primary market was previously open only to institutional investors but that changed recently.

DAD's securitisation was the first to break the barrier as its first tranche of securitisation worth Bt10.3 billion issued last year was also sold to retail investors.

Trading in the secondary market can be conducted via brokers licensed to conduct transactions on the Bond Electronic Exchange.

Securitised debentures must also be rated by rating agencies.

Besides DAD's recent securitisation project, earlier Aeon Thana Sinsap (Thailand) decided to securitise its future credit-card loans in the domestic market, but those bonds were snapped up by institutional investors.

Treekwan Boonnak, a consultant at Trinity Advisory 2001, said more corporations were interested in raising funds through securitisations programmes over the nex few years.

So, all active investors should be prepared for more issues on the horizon.

Piyarat Setthasiriphaiboon

The Nation