Analysis of Credit Risks in Asset Backed Securitization Transactions in Singapore

Posted: 6 Oct 2003

See all articles by Tien Foo Sing

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Gang Zhi Fan

National University of Singapore (NUS)

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Abstract

Asset Backed Securitization (ABS) is a relatively new financial instrument in Singapore's capital market, which has been accepted by developers (originators) as an alternative source of financing. Credit assessment and rating requirements have not been imposed on the ABS bond issues. Default risk evaluation has also been understated, if not omitted, in the process of structuring ABS deals. This is the first study that applies a theoretical default-risky swaps valuation model to evaluate credit risks in ABS bonds in Singapore. The Monte-Carlo simulation results, based on the Century Square shopping mall ABS case, show significant effects of the changes in rental volatility and default-free interest rate volatility on the default risk premium of swap. More specifically, an increase in the rental volatility reduces the default-risky swap values significantly. However, an increase in the instantaneous default-free interest rate volatility increases the default risk premium of swaps, and this effect is only observed in the high default-free interest rate volatility regime (above 20%). The results suggest that the rental dynamics of the securitized real estate are critical in determining the default risks of ABS deals. The fixed-rate (coupon yield) and floating-rate (rental cash flows) should therefore be adequately determined to reflect the default risks, which may be caused by the rental dynamics of the securitized real estate.

Keywords: asset backed securitization, default risks, fixed-rate cash flows, floating-rate cash flows, and swaps

Suggested Citation

Sing, Tien Foo and Ong, Seow Eng and Fan, Gang Zhi and Sirmans, C. F., Analysis of Credit Risks in Asset Backed Securitization Transactions in Singapore. Available at SSRN: https://ssrn.com/abstract=436945

Tien Foo Sing (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

Gang Zhi Fan

National University of Singapore (NUS)

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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