The bank will securitise the bulk of its transport sector financing portfolio for sale to institutions HSBC yesterday completed a ground-breaking deal to securitise HK$3 billion of its taxi and public light bus loans for sale to institutional investors to improve internal capital management and finance the expansion of its market share in the area. The deal marked the first synthetic securitisation of taxi and public light bus loans and the first balance sheet securitisation of non-mortgage loans to individuals and small and medium-sized businesses in Asia, according to international law firm Sidley Austin Brown & Wood, which advised HSBC on the deal. It could lead the way for similar synthetic securitisation offerings - in which banks transferred some credit risk to capital market investors but retained ownership of the assets - in Hong Kong at a time when competitive pressure was prompting banks to offload some credit risk on their balance sheets to improve returns on capital, analysts said. 'It's good for the Hong Kong market to get a new deal,' said a European banker, noting the scarcity of securitisation offerings in Hong Kong and the rest of Asia in recent years. The deal involves the bulk of about HK$3.5 billion in loans the Hong Kong flagship of HSBC Holdings had made to finance taxi and public light bus acquisitions and connected licensing fees. Sarwar Ahmad, HSBC's head of securitisation and structured capital market, said under the deal arranged by HSBC's securitisation team, an international insurer has taken up the HK$2.61 billion super-senior tranche. The unfunded tranche, which requires the investor to take credit risks in exchange for a premium typically below 50 basis points, accounts for 87 per cent of the deal and has been rated AAA by international ratings agencies Standard & Poor's and Moody's Investors Service. Banks and other financial institutions, local and international, bought the remaining assets, which had been structured as four tranches of five-year floating interest notes with ratings up to AA. The AA-rating tranche is believed to offer an interest spread of about 70 basis points above Hibor. The deal would allow HSBC to reduce the loans' risk weighting and release part of the capital it holds against them. 'By improving our internal capital, it allows us to support the growth of the business in a more efficient manner,' Mr Ahmad said. HSBC had an 8 per cent share of the Hong Kong taxi and public light bus loan market last year, a figure that had risen to 14 per cent this year. The lender aims to expand its market share to 20 per cent by the end of next year. Synthetic securitisation has been a common way for banks in Europe and the United States to manage their balance sheets. Hong Kong transactions had traditionally been backed by mortgage and credit-card loans. Offerings by Hong Kong issuers dropped sharply after 1999 after peaking in 1997 on the back of the property boom, according to data provider Dealogic. Last year, only two deals came to the market, raising US$271.81 million, compared with four deals in 1999 with a combined value of US$1.2 billion and the 10 transactions that raised US$1.9 billion in 1997. The offering had been warmly received due to the lack of such transactions, analysts said. Only Hong Kong banks had significant exposure to taxi loans and they could be more risky than mortgages, one banking analyst warned. The Asian financial crisis saw a sharp drop in the valuation of taxi and public light bus licences, which together with the vehicles, serve as collateral for the loans. Although licence valuation had remained stable in recent years, people were still more prone to default on them than mortgage payments, the banking analyst said. While other banks had cut their exposure in the area, Mr Ahmad said: 'The bank is comfortable with this asset class.'