Research Project Reference No : R-297-000-039-112 (On-going)
Principal Investigator :
Associate Professor Sing Tien Foo*, National University of Singapore
Associate Professor Ong Seow Eng, National University of Singapore
*Contacts : 68744553
Sirmans, C.F., University of Connecticut
Lim, Kian Guan, Singapore Management University
Securitization is a creative financing arrangement whereby debt instruments backed by assets such as mortgages, cash flows generated from the assets, are issued and offered for investment purposes in the capital market. The legal transfer of the asset to a special purpose vehicle that issues bonds is one key feature that distinguishes a securitization arrangement from the traditional mortgage-backed or collateralized bond issues. Therefore, the mere pledging of asset and gross rental income generated from the asset without taking the asset "off the balance-sheet" of the issuer is in the strict sense a step short of a sophisticated securitization deal. The establishment of a special purpose vehicle as a trustee of the securitized assets provides greater transparency and also secures a higher rating for the issue (Figure 1).
The first securitization deal in Singapore involved the sale of the headquarter building of the Neptune Orient Lines (NOL), the biggest shipping operator in Singapore , located in Alexandra Road . The transaction of the 26-storey building valued at S$185 million in December 1998 to the special purpose vehicle, Chenab Investments Ltd, was funded by the issuance of 10-year fixed rate mortgage-backed bonds. The success of the NOL deal has subsequently spun-off a series of securitization deals backed by primie commercial buildings. In 1999 alone, there were seven asset-backed bonds transacted, which collectively siphoned a massive S$1.92 billion worth of capital in the securitization of six commercial properties and one residential project that was still under construction (Table 1).
The interesting feature in the real estate-backed securitization deals in Singapore is the explicit incorporation of strategic investment options as an integral part of the transaction agreement (Figure 2). In the sale of the 21-storey Robinson Point, the headquarter of the Development Bank of Singapore (DBS), by its property listed vehicle - DBS Land, via the so-called asset-backed securitization (ABS) arrangement, a special purpose vehicle (SPV), Visor Limited, is set up specially to finance the transaction by issuing bonds. In addition to the sale proceeds of S$193 million, DBS Land also receives a 10-year lease-back option plus an American call option to buy back the building anytime from year 4 to year 10. When the call option is exercised, DBS Land is entitled to buy-back the office building at a discount to the prevailing market price, which is nonetheless not less than the original purchase price. The contractually exercisable lease-back and buy-back options are unique to the real estate backed securitization deals in Singapore , and they have been explicitly incorporated in the recent securitization of several major commercial buildings.
Unlike the traditional one-off type of en-bloc investment sale, the embedded buy-back options structured into the ABS confer the seller a right to contingent claim on the upside potential of the real estate if the price moves upward. These options are valuable especially when the market is volatile. It would be myopic not to recognize the economic benefits of these strategic options; in other words, it would be equivalent to providing free buy-back options to the originator of the ABS deals. The SPV and the investors who purchase the ABS bonds would thus bear the downside of the real estate risk, yet allow the originator to claim on the upside potential of the subject property. Being in such a disadvantaged position, the ABS investors would expect a higher bond yield to compensate them for additional risks in underwriting the embedded buy-back options via the SPV. To maintain risk-neutral positions between the originator and the bondholders, the premiums for the buy-back options should be adequately reflected in the prices of securitized real estate. The pricing of the embedded buy-back options is, therefore, of great theoretical and practical significance in this respect.
The option to buy back may not appear to be significant when the market is stable, but this option can severely tilt the risk-return trade-off between the option writers (the bondholders) and the option-holder (the originator/seller of the securitized asset) when the market becomes more uncertain.
The objectives of the research project are divided into 4 broad areas :
The research project has been completed and the findings have been published in the following refereed journals :