On behalf of the Hong Kong Mortgage Corporation I would like to
welcome you all to this signing ceremony to launch the Bauhinia MBS
Limited US$3 billion Mortgage-Backed Securitisation Programme.
This is a major milestone not only for the HKMC, but also the
financial industry in general. The new Programme will provide the
platform for the HKMC to develop an active secondary mortgage
market in Hong Kong. MBS provide an efficient channel for long-term
funds from the capital market to supplement bank financing of
long-term mortgage loans. They also help banks to manage the
liquidity and maturity mismatch risks inherent in their mortgage
business. Development of an active MBS market will also broaden
further the product range of the financial market in Hong Kong.
The HKMC has, since its inception in 1997, been gradually
putting in place the building blocks to support the long-term
development of the MBS market.
We made a modest start in October 1999 with the launch of the
Guaranteed Mortgage-Backed Pass-Through Securitisation Programme,
under which three series of MBS with an aggregate amount exceeding
HK$2.2 billion have since been issued. The back-to-back structure
of the MBS issued under that Programme allows the participating
banks to keep a substantial portion of the cash flow from the
mortgage pools, whilst reducing the credit risk and capital cost
through HKMC's guarantee of the securities. It also provides them
with the option at any time to off-load part or all of an issue to
suit their liquidity or trading objectives.
Another major building block has been the standardization of
mortgage origination documents. With the generous support of the
legal fraternity and the banking industry, the HKMC introduced, in
July 2001, the Model Mortgage Deed and the Model Deed of Guarantee
and Indemnity. The three note-issuing banks are taking the lead in
adopting these model documents. This should pave the way for
general adoption by other banks. Over time, this will facilitate
the mortgage securitisation process by removing the need for due
diligence review of documentation by credit rating agencies and
investors.
The third pre-requisite for a sustained MBS issuance programme
is a regular source of sizeable mortgage purchases. To this end the
HKMC achieved a major breakthrough earlier this year when it
entered into agreements with the Housing Authority and the Housing
Society to purchase over HK$20 billion of mortgage loans from them
for settlement in 2001 and 2002.
With these building blocks in place, the HKMC is now ready to
launch a fully fledged bond-style MBS programme. Great care has
been taken to design the Programme in such a way as to provide a
convenient, flexible and cost-efficient platform for the issuance
of MBS. The multi-currency Programme supports the issuance of MBS
denominated in Hong Kong dollars or other major currencies. The
bond-style structure will facilitate the trading of MBS and hence
enhance their liquidity in the secondary market. The Programme also
provides extensive credit enhancement options, including credit
guarantee, tranching, over-collateralization and reserve funds, to
suit the investment and balance sheet management needs of
individual investors and investors of different risk appetite.
In terms of issuing strategy, the HKMC intends to focus
initially on the Hong Kong dollar market and to launch two products
that are familiar to capital market participants. These products
include a single class MBS with HKMC's guarantee on repayment of
principal and interest of the mortgage pool, and a multi-class MBS
with credit-enhancement provided through segmentation of the issue
into senior and junior tranches, with reserve fund or
over-collateralization arrangements.
The initial focus on the Hong Kong market is in line with our
objective to promote an active MBS market locally. The intention of
starting with simpler products is in recognition of the fact that
MBS is a relatively new financial instrument to the Hong Kong
market and that it takes time for investors to familiarize
themselves with the product features and their economics. Over
time, and depending on investor demand, the Corporation may
gradually introduce products with more complicated structures or
denominated in other currencies.
For the year 2002, the HKMC plans to launch two or three issues
under the new Programme with an aggregate issue amount of HK$3-4
billion. The debut issue, for an amount of about HK$2 billion, has
been scheduled for the first quarter of next year.
The HKMC also welcomes banks to make use of the new Programme to
arrange securitisation of their mortgage portfolios. Through
standardization of product structure and legal documentation, the
lead time for arranging an issue will be shortened substantially,
from 6-9 months for a stand-alone issue to a few weeks under the
HKMC Programme. This will provide a highly convenient platform for
the banks to convert their illiquid mortgage portfolios into liquid
MBS when required.
I would like to take this opportunity to thank Merrill Lynch
International, the Arranger of the Programme, for their valuable
advice and active participation in helping us to bring the
Programme to the market. In addition, we are grateful to other
members of the Dealer Group - Barclays Capital, Dao Heng Bank,
Deutsche Bank, HSBC, JP Morgan, Salomon Smith Barney and UBS
Warburg - for their staunch support. I look forward to their active
participation in arranging both public issues and private
placements under this Programme, to match the appetites of both
local and overseas investors.
