Governance and optimal financing for asset‐backed securitization
| Published date | 01 October 2004 |
| DOI | https://doi.org/10.1108/14635780410556898 |
| Pages | 414-434 |
| Date | 01 October 2004 |
| Author | Gang‐Zhi Fan,Tien Foo Sing,Seow Eng Ong,C.F. Sirmans |
| Subject Matter | Property management & built environment |
Governance and optimal financing
for asset-backed securitization
Gang-Zhi Fan, Tien Foo Sing and Seow Eng Ong
Department of Real Estate, National University of Singapore, Singapore
C.F. Sirmans
School of Business, University of Connecticut, Storrs, Connecticut, USA
Keywords Assets management, Governance, Singapore
Abstract Asset-backed securitization (ABS) is an interesting financial innovation whereby debt
instruments backed by cash flows generated from income-producing assets are issued for investment
purposes in the capital markets. This study examines the characteristics of ABS transactions in
Singapore and evaluates whether proper governance mechanisms have been developed to protect
ABS investors. We examined the unique features of the Visor case, such as rental guarantee, large
block ownerships of junior bonds, credit enhancement, embedded options, managerial relationships
between the SPV and servicers, and critically evaluated the effects of these characteristics on the
governance of ABS. Rules on separation of banks’ participation in ABS and the accountant’s
requirement of “clean sale” that affect the ABS structure were also discussed. We also develop
a simple information asymmetric model to evaluate the pecking order choice of two different
financing methods: collateralized loans and ABS.
1. Introduction
Asset-backed securitization (ABS) is a creative way of raising funds through the
issuance of marketable securities backed by predictable future cash flows from
revenue-producing assets. Over the past two decades, ABS has grown to become
an attractive funding avenue for developer in the capital markets. However, ABS is
a relatively new instrument in Asia and research on this instrument has been scarce.
Many issues relating to ABS transactions are still not rigorously examined at the
current stage. ABS process is a more complex transaction compared to the traditional
funding approaches provided by financial intermediaries. In this study, we investigate
the characteristics of ABS transactions in Singapore and the governance structure
provided to protect ABS investors, using a case study methodology.
Corporate governance is referred to the check and balance mechanisms put in place
in corporations to protect investors’ interests and assure that returns on their
investment are fairly distributed. Issues of corporate governance have attracted great
interests from academics, legislators and practitioners in the past decades. Academic
studies, however, focus mainly on corporate governance of publicly held companies.
Unlike the traditional collateralized loans, ABS is a more sophisticated financial
innovation that involves off-balance sheet transfer of assets into a special purpose
vehicle (SPV), which in turn issues marketable securities to fund the purchase of the
assets. The creation of the SPV structure separates the suppliers of financial capital
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
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The authors wish to thank National University of Singapore for providing research grants for
this project.
JPIF
22,5
414
Received February 2004
Accepted March 2004
Journal of Property Investment &
Finance
Vol. 22 No. 5, 2004
pp. 414-434
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780410556898
from the management. Will this structure create potential governance problem in
ABSs? Are the ABS investors adequately protected in the ABS structure? These are the
questions that will be examined in this study.
The SPV structure has been a key and indispensable element in the ABS
transactions (Cooper, 2000). It is also a feature that distinguishes ABS deals from other
traditional collateralized bond issues. Studies have been undertaken by researchers to
examine various issues relating to ABS transactions. Thomas (1999, 2001) examined
wealth effects of securitization transactions of non-government guaranteed assets.
Lockwood et al. (1996) investigated the wealth changes in the securitization of auto
loans, credit card receivables, and trade and lease receivables. In Singapore, buy-back
options (Sing et al., 2003) and credit risks (Sing et al., 2004) associated with the ABS
transactions were evaluated. Studies that examine governance in SPV structure have,
however, been limited. Riddiough (1997) developed a model of asymmetric asset value
information to examine how governance can be optimally designed through the
proportional split of senior and subordinate bond structure to ensure efficient
liquidation payoffs in ABS. This study also attempts to look at the organizational form
and managerial structure of special purpose vehicles (SPVs) and evaluates whether
they are effective form of governance mechanisms for ABS transactions.
In Singapore, ABS transactions are a recent phenomenon with the first securitization
transactioninvolving the Neptune OrientLine Headquarter located at AlexandraRoad in
1999. Nine other ABS transactions involving income-producing properties were
subsequently concluded in the subsequent years. The details of the six early ABS
transactionsare given in Table I. Owing to thesmall number of ABS deals and the paucity
of transactiondata, case study approach is usedinstead of the empirical analysesto study
the issuesof governance in ABS in this study. Thispaper is organized as follows.Section 2
reviews concepts and common mechanisms in governance theories. In Section 3, the
landscape of capital market in Singapore and the typical structure features of ABS
transactions are discussed. Section 4 examines governance issues and mechanisms
associatedwith ABS transactionsusing the case of SPV, Visor Limited.Section 5 develops
a simpleinformation asymmetricmodel to explain theoptimal choice problemfaced by the
originatorbetween two alternativefinancing sources. The paperis concluded in Section 6.
2. Corporate governance mechanisms
Shleifer and Vishny (1997) formally define corporate governance as “the ways in which
suppliers of finance to corporations assure themselves of getting a return on their
investment”. Corporate governance consists of a set of mechanisms designed to protect
investors against expropriation by insiders and management. Some of these
mechanisms include large block investors, board independence and composition,
legal protections and external market control via debt issuance. The agency problems
arising from the separations of the ownership, the management, and the suppliers of
finance in many modern corporations are the potential problems in governance
structure (Shleifer and Vishny, 1997). Information asymmetry between the three
parties could be mitigated by optimal designs.
2.1 Large/block investors
The ability of individual investors to exert significant influence on corporation
management via his/her voting rights is limited when investment shareholdings are
Governance and
optimal
financing
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