What is
“Asset Restructuring”?
“Asset Restructuring” is a specialized
“open-end” valuation approach by comparing the retrospective, present and future
values and risks of an asset or a parcel of assets with different origins, natures and
qualities. More precisely, It is a value-added process to quantify those premium claims
for tangible assets such as land, property and mortgage through debt consolidation,
packaged credit supports, feasibilities and appraisals, and mathematical remodelling
techniques. In a word, it is a method of
securitisation from which packaged assets can become feasibly listed and traded in form of
Asset-Backed Securities (ABS) on an exchange.
Why is it important to have
assets restructured in a bond issue?
The purpose of bond
issuing is to borrow the necessary amount of loan sufficiently enough to fund the
development of a project. In order to structure an Asset-Backed Security (ABS)
product, the nature, value and quality of the underlying assets (collateralised assets) of
a bond are sensitive to its overall marketability, pricing, credit quality and risks
involved.
Listing of a bond is very
different from the listing of an enterprise in many ways since the issuer of a bond in
most cases is either a listed company or if it is a private company, it has to meet
certain shareholder’s funding as well as asset value requirements, and to the extent
of its unilateral nature of each bond, the process involved with such an issue of bond is
nevertheless more straight forward and less prudent in their scrutiny of the application
than stock listing as viewed by the exchange.
The winning solution of an
issue is to balance all parties’ interests which include the issuer, sponsors,
investors and other servicers in the pool, since its marketability and market perception
represent the ultimate amount of the proceed that can be raised from a bond structured as
such during an offer. As each and every type
of credit enhancement involves certain on-going cost, It is equally important to evaluate
the structured assets collateralised with a bond as to determine the adequate amount of
credit supports required for securing the target credit rating of a bond.
The valuation approach adopted
in the asset restructuring process is crucial, most of the standard approaches will either
result in an unacceptably low valuation which hinders the pro-forma value of the
underlying assets or create a remarkably high value assumption model which kills its
attractiveness and market reception.
In view of all the concerns
above, it is technically important to identify and to the extent, disintegrate all the
weaknesses as well as strengths of the assets, debts, costs as well as operational and
management adequacy involved with an issue, re-evaluate and repackage them separately or
collectively for the best possible marketable value and then reconsolidate them together
with adequate value-added supports during the course of asset restructuring.
What will WAM deliver in the
process of “Asset Restructuring”?
WAM will
lead and form a “project team” with professionals from the financial, investment
and legal sectors to perform tasks in asset restructuring as well as the required process
of listing application. The “project team” will render services in the areas of
Followings are the FAQs found in the issue of Land Bonds,
"What
is going to happen to those Land Bonds if the rezoning process fails?"
Due to the risky
nature of Land Bonds, issuers usually have to provide substantial guarantees and/or
insurance protections in order to entice investors. It is important to look at the credit
quality as rated by major credit rating agencies, and redemption features incorporated
with the bonds.
"What will happen if the company/issuer fails to
facilitate the sale of the land assets on or before the maturity date or if the selling
price is below the cost of the land assets or the par value of the bond due to drastic
market downturn?"
The management
company/issuers have to perform regular appraisals of the underlying land assets so as to
keep investors informed on possible changes in the market. It is a common condition lied
in the Land Bonds that issuers will have the option to buy those underlying assets back at
an opened market value possibly with a discount predetermined at the time when the bonds
are first issued. In the case of a profitable nature, the outcome would be straightforward
since the premium earned for the bond will be based on the net appraised value after
discount. However, in the case of a loss in sales or in the appraised value of the land
assets, bondholders will have to rely on the exit options available from those guarantees
and/or insurance coverage.
"How should bondholders react to volatile price
fluctuations caused by unfavorable disclosures on the progress of rezoning or the sale of
the land assets? Should they dump the bonds even with a loss? Or should they hold them
until the maturity date then make a claim from the guarantees provided?"
Since most of the
bonds are monitored by major credit rating agencies, security houses and analytical
services companies throughout their lifetime, investors can obtain these regular
appraisals from various sources. If unfavorable market news occurred that might affect the
well being/rating of a bond, alerts such as "credit watch" to the extent of
possible "downgrades" will be pronounced by these companies. In case of a credit
downgrade caused by the downside prospect of the underlying land assets, it is important
to look at the quality status of those guarantees and credit supports maintained by the
issuer and other credit support providers. As long as the credit quality and the
collateral (that include additional asset or financial backing in case of a doubtful
situation) are well maintained by the issuer, it is advisable that investors keep their
bonds and make their claims at maturity. In the worst scenario when such downgrades are
significant especially when a bond’s rating drops out of the
"investment-grade" category due to deterioration of credit quality resulting
from downgrades on the credit quality of its issuer, parents of the issuer, sponsors or
insurance providers, and/or insufficient credit supports; investors may have to make a
hard decision as to cut further potential losses.
Followings are the
FAQs found in the issue of Property Bonds,
"Will the
original issuer of the Land Bond have an overlapping interest in the subsequent issue of
Property Bond?"
Yes and No. If the original issuer of Land
Bond decided to develop the property themselves and subsequently issued the Property Bonds
to cover the cost of the land and the related construction costs incurred with the said
development, this can only be done after the full retirement of the captioned Land Bond.
In case of a Property Bond being issued by the developer who purchased the land from the
original owner or issuer of the Land Bond and who is a separate entity, the original
issuer of the said Land Bond may or may not have an interest in the Property Bond
depending on the terms and conditions of the Sales and Purchase Agreement set between the
two principal parties. Nevertheless, such an issue is a major issue which requires full
disclosure and approval from both Board of Directors as well as majority consent of the
shareholders and creditors/bondholders.
"What
should I do if the strike price exceeds the par value of the bond?"
This is just a temporary phenomenon of
supply and demand in a volatile market largely regulated and driven by the market makers
at a particular period of time. The ultimate benefit of investing in bonds lies in the
predominant nature of stable yields, predictable payment patterns and guaranteed options
attainable at the time of maturity. In some instances, where the strike price might seem
to be attractive, however, investors should look into the average yield of their
investment over a predetermined period of time rather than scarifying those long-term
gains caused by the tempting short-term premiums. Unless the strike price of a bond posts
a profit that significantly exceeds the expected average yield of a bond, investors might
make their bonus claims by selling their bonds at such an exceptional but rare market
condition.
"What are
the reasons for Property Bond to have a lower profit sharing ratio than Land Bond?"
It is mainly due to differences in risk
level incorporated with the products in respect to the risk tolerance levels as well as
the expected investment expectations and behaviors of the target group of investors.
Followings are the
FAQs found in the issue of Mortgage Bonds,
"Since
Mortgage Bonds are by far one of the safe havens found in investment, Does it mean that
they are risk-free particularly with those government-backed MBS which carry the highest
credit ratings?"
No. There is no absolute safe haven found
in the investment market, since every investment carries certain kind of risks including
government-backed securities due to unpredictable and uncontrollable market and political
variables. Creditability of a bond only represents its credit standing among those
classified bonds with comparative values at a given time. It does not reveal the long-term
stability of a bond in respect to drastic changing factors. Therefore, all bonds that
carry credit ratings by major credit rating agencies are subject to regular and periodic
credit reviews over their lifetime as to reflect their individual qualities in terms of
market condition, and credit and operational adequacy caused by possible changing effects
both internally and externally.
"As most
government-backed MBS carry the highest credit ratings, what are the benefits of investing
in those private-label MBS with lower credit qualities?"
First of all, not all government-backed MBS
carry the highest credit ratings in the market. Every government or country carries
different credit ratings as well as sovereignty risks in respect to foreign reserve,
budgetary and treasury debt status, trade surplus or deficit, political stability,
economic development and market efficiency, tax and tariff regulations, and strength of
the currency. There are privately issued MBS that carry the highest credit rating of AAA
from accredited credit rating agencies. It is important to look into the areas of quality
of the underlying assets, guarantees and redemption features, and other investment options
available to bondholders. Needless to say, those quality bonds which carry the highest
credit rating tend to have less risk but bear lower return to investment.
