Asset-Backed Securitization in Singapore: Value of Embedded Buy-Back Options
Posted: 28 Apr 2003
Abstract
Asset backed securities have been promoted as an important financing instrument for property developers to raise capital in Singapore. In 1999 alone, $41.92 billion worth of bonds have been issued via the securitization of six commercial properties and one residential condominium project under construction. Buy-back option is a unique feature embedded in the asset backed securitization (ABS) in Singapore, which allows the originator to retain a contingent claim on the upside potential of the asset price. Based on the multi-period binomial option pricing framework proposed by Cox, Ross and Rubinstein (1979), the prices of the options embedded in the ABS contracts are estimated. Using the securitization of the 132,111 square feet 268 Orchard Road office building for illustration, the premium of the options embedded in the 10-year ABS deal was estimated at $428.47 million, or 15.48% of the bond value. Recognition of the value of embedded options is important for structuring a fair and transparent ABS deal.
Keywords: asset backed securitization, buy-back option, option premiums
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