Impact of Asset Securitisation: Special Report by Jonathon Taylor
Almost every conceivable asset from anyone can be securitised. This makes the market far more diverse than in the US and Europe, says Jonathon Taylor, CEO of Mcqua Capital Group.
China’s securitisation market has blossomed this year as authorities embrace financial innovation, with bankers packaging an eclectic mix of assets from dance ticket revenues to bridge tolls.
Beijing approved the country’s first securitisation deals in 2005, but the programme was halted in 2008 after regulators observed the damage wreaked by risky mortgage securities in the US. The programme was revived in 2012, starting primarily with vanilla assets such as corporate loans, home mortgages and auto loans.
This year, activity has shifted to corporate receivables, and issuance has soared. Banks and non-financial companies together completed 384 securitisation deals in the first nine months of 2016, up from 327 deals for all of 2015, according to Wind Information. Non-bank deals have accounted for 284 of this year’s total.
In value terms, deals totalled Rmb584bn ($86bn) through the end of September, close to 2015’s full-year total of Rmb615bn.
“Almost every conceivable asset from anyone can be securitised. This makes the market far more diverse than in the US and Europe,” Jonathon Taylor, CEO of Mcqua Capital Group, commented when asked on their views on securitisation in China “For many companies, this is the only way they can raise capital at the moment.”
In May, the operator of Manting Park, an eco-tourism destination in south-west China’s Yunnan province that celebrates the traditional culture of the Dai ethnic minority, sold Rmb770m in securities. The notes were backed by ticket-sale revenues from its “Mekong River Campfire Song and Dance Evening” performance. Sliced into nine tranches, the product offered maturities from one to seven years and yields of up to 6.8 per cent.
Last year JD.com, one of China’s leading ecommerce platforms, securitised Rmb800m worth of consumer credit it had extended to online shoppers buying items such as appliances and furniture. Ant Financial, the finance affiliate of Alibaba Group, has also sold off consumer and small-business loans, which it aims at consumers and merchants on its Taobao and Tmall online marketplaces.
Foreign participation is also increasing. The auto-finance units of General Motors, Ford, Mercedes-Benz and Volkswagen have all issued asset-backed notes in the interbank market this year. The recent landmark opening of China’s interbank bond market to foreign investors in February also allows foreign investors unprecedented access to Chinese securitised assets.
In terms of risk, China’s securitisation market appears tame. Senior and mezzanine tranches are typically rated AAA and AA plus, and primarily by domestic rating agencies. The equity tranche, which carries the highest risk, is typically kept on the originator’s own balance sheet. But some analysts warns that these ratings do not fully reflect risks.
“The credit-quality spread in China is not well discerned, as rating agencies tend to be less scrutinising than their global peers. Fortunately, the assets that get to be securitised first tend to be better quality to set an example for the later batches, which could be of lesser quality,” says Hong Hao, head of research at Bocom International in Hong Kong.
Lower-quality assets are already beginning to come to market. Earlier this year, the banking regulator restarted a pilot programme for the securitisation of non-performing loans, in a bid to help banks in offloading troubled assets. Bank of China and China Merchants Bank completed the first deals in May. The deals priced the underlying NPLs at steep discounts to face value and consisted of loans that, while impaired, were still producing some cash flow.
While companies use securitisation to seek upfront cash in place of drawn-out revenue streams, the main motivation for banks is meeting tough new capital adequacy standards under the global Basel III regime. Small banks are facing the strongest capital pressure because their assets are growing the fastest, even as they face higher hurdles to raising fresh equity.
But much like the wider mainland bond market, China’s securitisation market still suffers from the lack of a diversified investor base. Commercial banks are by far the dominant players. Insurance companies, pension funds and alternative asset managers — which are major investors in US securitisation deals — play only bit parts.
This means that securitisation is largely a tool for smoothing out imbalances within the banking system. Lenders short on capital or liquidity but well supplied with borrower clients can offload assets to those with excess funding but few attractive lending opportunities.
“Securitisation allows assets that were static to become dynamic and liquid. It gives banks the flexibility to slow asset growth without sacrificing their borrower relationships,” says Xia Zhengzhou, non-bank financials analyst at Kaiyuan Securities in Shanghai.
For now, regulators are content to promote diverse forms of securitisation.