I. Introduction

Indonesian business and investment project has begun obstructed since the economic crisis arose in 1997. The crisis had brought Rupiah into a great depreciation. Indonesian companies have founded difficulties in funding its business, and the investors have lost their trust to invest. Such condition causes capital flight in a great scale. One of way to gain an external funding is through securitisation process. In practice, the term of securitisation is almost identical with Asset Backed Securities (“ABS”). The underlying assets commonly is in the form of account receivables encompassing account receivables from house mortgage, car installment, credit card, leasing, etc. ABS counted to be one of the recent progresses in capital market. Started from the issuance of credit card asset by Citibank in 1995, as has been practiced in overseas before. [2]

Indonesian capital market, especially Indonesian Capital Market Supervisory Agency (“Bapepam”) has provided relevant regulations concerning the asset back securities. The aforesaid regulation encompassing the issuance of asset backed securities, prominence, risk, credit escalation, and other problems arising from the issuance of asset backed securities.

Asset backed securities aiming to obtain liquidity since such liquidity can only be provided by Central Bank and Banking system prior to the issuance of ABS. The existence of comprehensive regulation will support ABS trade, henceforth will give an opportunity for Central Bank to participate in ABS trade, thus liquidity can be distribute to a riel sector.[3]

II. Legal Basis

Several Regulations concerning Asset Backed Securities are as follows:

1. Law No.8 of 1995 on Capital Market
2. Bapepam Regulation No.V.G.5 on Investment Manager Functions Relating to Assets Backed Securities
3. Bapepam Regulation No.VI.A.2 on Functions of Bank Custodians Related to Asset Backed Securities
4. Bapepam Regulation No.IX.C.9 on Registration Statement for Asset Backed Securities Public Offering
5. Bapepam Regulation No.IX.C.10 on Guidelines of Form and Content of Prospectus for a Public Offering of Asset Backed Securities
6. Bapepam Regulation No.IX.K.1 on Guidelines for Asset Backed Securities Collective Investment Contract
7. Bank Indonesia Regulation No.7/4/PBI/2005 on Prudential Principles in Asset Securitisation for Commercial Bank

III. Definition of Asset Backed Securities

Based on BI Regulation No.7/4/PBI/2005, “Asset-backed Securities” (ABS), are securities issued by the Issuer on the basis of the underlying reference assets provided by an Originator.

Securitisation can be defined as a transformation of a non-liquid asset into an easy to trade commercial paper, which pursuant to investor’s needs.

Few definitions of Asset Backed Securities are as follows: [4]

1. Knowledge Bank from Lyons Financial Solutions Holdings Ltd, especially which regarded to their research on Securitisation Explained, mentioned that:
   “Asset-backed securities are securities that are primarily serviced by cash flows of securitized assets that attract interest on the basis of either being fixed or variable for maturities that can be fixed, revolving, either long term or short term that by their own terms converts into cash over the duration attached to them”.
   

2. Ian H. Giddy, Professor of Finance New York University, elaborates in his website:
   “Asset-backed securities are securities which are based on pools of underlying assets”.
   

3. In Dr. Tsui Kai Chong slides on Asset Backed Securities, mentioned that:
   “Bonds or notes that are backed by financial assets”.
   

4. Refer to Rahmat Bastian Asset-backed securities (ABS) is an asset-based financing in which the financing (given by the holder of the ABS when issued) is secured with debt securities and receivables (the assets) of an originator (the initial creditor, that is, a financial institution or corporation). These assets usually comprise securities (bonds, notes or commercial paper) and receivables (consumer loans, trade receivables or leases) that can be structured or repackaged into liquid and profitable securities in the form of ABS. Whenever the underlying assets fall under the category of non-liquid assets, the role of credit enhancement provider and existence of products such as financial instruments (letters of credit, insurance policies, interest rate guarantees, option or swap products) will be significant enough to improve portfolio quality and its rating by the rating agency. The role of a servicer, which is authorized by the SPV to monitor and manage the operation of claim recovery and, if necessary, selects the most appropriate methods of legal action, is also no less significant.[5]
   

5. Indonesian Capital Market Regulations has clearly defined that Asset Backed Securities are securities issued by Collective Investment Contract, which its portfolio comprises of financial assets such as proceeds arising from commercial paper, credit card, and future receivables, credit issuance, including house loan, credit enhancement and other financial assets.

In general, there are 2 (two) types of Asset Backed Securities which pursuant to Indonesian Capital Market Regulations:

1. Fixed Cash Flow Asset Backed Securities, is an asset backed securities, which give certain income to its holder, as if to the holder of payable securities.
2. Variable Cash Flow Asset Backed Securities , which give an unfixed income to its holder, as if to the holder of equity.

IV. Asset Backed Securitisation

Nowadays, securitisation has shown its rapid development. Subject to securitisation not only limited to financial assets, but has also broaden into other kind of assets such as airplane, building, and in the other side, has also applied for securitisation upon risk, such as insurance risk, weather risk, etc.

Asset Backed Securities (ABS) can be mentioned as a recent type of securities in capital market. Bapepam has provided supported regulations, but up to this moment, there is no specific Law pertaining Securitisation or special purpose vehicle except from the interpretation of Law no.8 of 1995 on capital Market. Based on Indonesian Capital market regulations, Securitisation Process is a Collective investment contract which is not in the form of legal entity, but in the form of contract made by Investment Manager and Bank Custodian which relatively unique because also binds the ABS holder. Basically based on Article 1338 Indonesian Civil code (“ICC”), a contract binds the parties who made it, but this Collective investment Contract also binds the third party (based on the accession principle), who is the ABS holder. Therefore, the ABS holder also binds by all rules mentioned in the Collective Investment contract.

Based on BI Regulation No.7/4/PBI/2005 “Asset Securitisation” is the issuance of securities by an issuer of asset backed securities on the basis of transfer of financial assets from the originator followed by payment from the proceeds of sale of asset-backed securities to investors.

Based on Article 3 BI Regulation No.7/4/PBI/2005, In Asset Securitisation, a Bank may function as:
a. Originator;
b. Credit Enhancer;
c. Provider of Liquidity Facility;
d. Servicer;
e. Bank Custodian;
f. Investor.

Asset Backed Securitisation like other securitisation process, commonly can be defined as securities formation process, in the form of capital market instruments which comprises of assets, either financial assets or receivables which legally will be under the control of the holder of the ABS holder (Investor) which represented by a Special Purpose Vehicle, in the form of Collective Investment Contract.

Basically there are two concepts of investment return in asset backed securitisation:[6]

1. The repayment of principal debt and its interest, conducted in the same time with a structured period in a certain period, usually known as Amortizing Backed Securities;
2. The repayment of interest conducted periodically, while the repayment for its principal debt conducted in the end of period, or usually known as Non-Amortizing asset Backed Securities.

In its development, the repayment method can be in the combination of the two methods, which in such periodic time the payment only cover its interest and afterwards the payment also encompassing principal debt and its interest.

V. The Issuance of ABS-CIC

There are few stages as follows:[7]

• Investment Manager (“IM”) and Bank Custodian (“CB”) made a Collective Investment Contract (“CIC”).
• IM bought financial assets/receivables from the early creditor and re-register on behalf of CB.
• CB conducts payment to early creditor upon the purchasing of financial assets.
• CB maintain the financial assets in the account of CIC-ABS
• IM issued ABS to the investors
• CB receives payment for the purchasing of ABS from the investors.
• Early creditor act as a service provider to maintain installment upon debtor’s receivables.
• CB receives installment payment upon debtor’s receivables from the service provider.
• CB pays interest and indebtedness to the investor.

VI. Function of Bank Custodian Related to Asset Backed Securities

Based on Bapepam regulation No.VI.A.2, Bank Custodians must:

1. perform collective custody and safekeeping of all valuable documents relating to the Asset Backed Securities Collective Investment Contract;
2. act as the depository for funds that are financial assets of the Collective Investment Contract portfolio;
3. deliver and receive assets on behalf of the Collective Investment Contract,
4. upon orders of the Investment Manager, make payments for all transactions that are related to the Collective Investment Contract;
5. register financial assets of the Collective Investment Contract portfolio in the name of the Bank Custodian;
6. perform the accounting for things that are related to the Collective Investment Contract;
7. make and maintain a register of holders of the Asset Backed Securities and record transfers of ownership of such Securities or indicate the Securities Administration Agency that will provide such services based on the decision of the Investment Manager;
8. separate the financial assets of the Collective Investment Contract from the assets of the Bank and or the assets of other Bank customers;
9. report in writing to Bapepam within 24 (twenty four) hours, if the Investment Manager acts in a way that may cause financial harm to holders of the Asset Backed Securities;
10. perform other duties that relate to the Collective Investment Contract as provided in the Contract.

The aforementioned regulation also provided that the Bank Custodian shall receive payment for services as provided in the Collective Investment Contract from the assets of the Collective Investment Contract portfolio. The Bank Custodian must carry out the instructions of the Investment Manager as provided in the Collective Investment Contract, and if the Bank Custodian receives instructions from the Investment Manager that are contrary to the Asset Backed Securities Collective Investment Contract or contrary to its responsibility to protect the financial assets of the Collective Investment Contract, the Bank Custodian must:
a. report the instructions in writing to Bapepam; and
b. execute the instructions only if Bapepam gives prior approval.

The aforementioned regulation also stipulates that Bank Custodian may be replaced by the investment Manager or by Bapepam.

VII. Registration Statement for a Public Offering of an Asset Backed Securities

Regulated under Bapepam Regulation No.IX.C.9, mentioned that; a registration statement for a Public Offering of Asset Backed Securities shall be submitted by the Investment Manager to Bapepam in the following manner:

1. Submitting the Registration Statement using Form Number IX.C.9-1, attachment 1 of this rule;
2. Submitting the Registration Statement in 4 (four) copies;
3. Attaching such documents as the following:

• the Asset Backed Securities Collective Investment Contract that has been notarized by a Notary that is registered with Bapepam;
• other agreements that relate to the Asset Backed Securities;
• the proposed final Prospectus (stamped and signed);
• a sample Asset Backed Securities certificate;
• a legal opinion;
• financial reports on the Asset Backed Securities Collective Investment Contract that has been audited by an Accountant; and
• documents that contain the results of the rating from a rating agency licensed by Bapepam.

If such Registration Statement has or has not fulfilled the requirements, Bapepam shall notify the applicant stating that:

1. the Registration Statement is incomplete using Form Number IX.C.9-2, attachment 2 of Bapepam Regulation No.IX.C.9; or
2. the Registration Statement is declared effective by Bapepam, using Form Number IX.C.9-3, attachment 3.

VIII. Superiority and Risk of Asset Backed Security[8]

Superiorities of asset backed securities are as follows:

• Lower Cost Fund, the issuers will spend lower cost rather than before. It is shown through the enhancement of secured receivables quality rating. A high quality will secure the investment.
• Efficiency on the use of equity, because the existence of asset backed security will enhance the leverage of balance sheet and efficiency in using current capital.
• Diversification of funding source, which not only can be applied by a major company, but also by a small company.
• Source of Liquidity, especially for a middle low company, which often faces traditional lending system. The existence of asset-backed securities will support the development of such company.
• Less public disclosure than competing methods of financing.

The risks may arise from asset backed securities are as follows:

1. Interest rate, which cause fluctuation to ABS if the interest rate changes, and will decrease ABS price if the interest rate increase.
2. Early call will affect receivable yield.
3. In the event of default, the holder of ABS will suffer a financial loss if the debtor of the secured asset suffer a bankruptcy or cannot pay the debt and its interest on time.

The facility of credit enhancement is a facility aiming to enhance the quality of financial asset in collective investment portfolio, in the event of repayment to the ABS holder, which can be classified into :

a. Internal credit enhancement facility, comprises of ;

1. Subordinate, which means that securities in the higher level will be protected by securities in lower level.
2. Over Collateralization, this means that bigger value of portfolio asset will secure smaller value of portfolio asset.
3. Excess Servicing.
4. Excess Spread, because there is a margin between underlying asset coupon and securities emission coupon.
5. Reserve Fund, use to indemnify the financial loss up to the limit of the reserved fund

b. External Credit Enhancement Facility, comprises of :

1. Surety Bonds, means that indemnification paid by the insurance company obtains the same rating as the claim rating of such insurance payment.
2. Letter of credit (L/C), usually perform by bank to pay the financial loss caused by ABS.
3. Third Party or parental guarantees, means that holding company of the seller or servicer guarantees the financial loss of ABS up to certain limit.
4. Cash Collateral Account, in this matter issuer lend a several enhancement credit, usually from commercial bank, and invest it in the higher rate of short term securities

IX. Conclusion

Asset Backed Securities (”ABS”) can be considered as a recent type of capital market instrument in Indonesia. Bapepam has provided supported regulations, although up to this moment a specific Law pertaining ABS has not been issued yet. The underlying asset usually is in the form of receivables. Asset Backed securities gives an alternative funding source to gain liquidity. The uniquely of ABS is because this security based on Collective Investment Contract which not only binds the parties who made it, but also bind the ABS holder.

— END —

[1] I am thankful to Chandra Karina, Lubis Ganie Surowidjojo Lawfirm (Indonesian Lawfirm), for furnishing materials for this Law Blog.

[2] Translated from Departemen Keuangan RI, Tim Studi Efek Beragun Aset “Studi Tentang Perdagangan Efek Beragun Aset”, 2003, www.bapepam.go.id/ layanan/kajian/perdagangan_eba.pdf , accessed September 16th 2006.

[3] Translated from, “Efek Beragun Aset, Alternatif Mengatasi Kebekuan Likuiditas”, Kompas 21 agustus 2003, http://www.kompas.com/kompas-cetak/0308/21/finansial/501877.htm, accessed September 16th 2006.

[4] Point 1 to 3 translated and cited from Departemen Keuangan RI, Ibid.

[5] Rahmat Bastian, “How Asset Backed Securities Work in Indonesia”, http://www.newratings.com/analyst_news/article_994987.html, accesed September 18th 2006.

[6] Departemen Keuangan, Ibid.

[7] M.Irsan Nasaruddin and Indra Surya, “Aspek Hukum Pasar Modal”, (Jakarta: Kencana, 2004), page 200-201.

[8] Translated from Departemen Keuangan, Ibid.