Fitch Ratings last week said the publishing of securitization rules in China could spur growth in the emerging market over the next two years. However, the agency cautioned that the rules - jointly administered by the People's Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) - currently only apply to financial institutions. Fitch says the exclusion of corporates will limit activity over the short term.
The PBOC and the CRBC have, to date, introduced three ministry level rules, which provide a basic legal framework for ABS issues. "One of the key points of the rules addresses tax and accounting issues, it states that originators can remove the entrusted assets from the balance sheet only if it has transferred at least 95% of the risk and return associated with the entrusted assets," explains Jet Zhou, Fitch's associate director of structured finance in Beijing.
To date, three pilot deals have been completed under PBOC/CBRC guidelines. In December, China Construction Bank completed its RMB3 billion ($371.6 million) RMBS, while China Development Bank (CDB) simultaneously closed a RMB4.2 billion infrastructure loans CLO.
At the end of April, CDB tapped its Kai Yuan special purpose trust again with a RMB5.8 billion deal backed by the same assets. China Credit Trust acted as bookrunner, with pricing ranging from 73 basis points over the one-year deposit rate for the 1.79-year triple-A piece - effectively 3% on a fixed basis - to 121 basis points on the 3.35-year, single-A tranche.
Recently, the PBOC and the CBRC submitted an assessment report of how the first two issues have performed since launch to the State Council, China's highest legislative body. It is believed the regulators made recommendations on how to proceed with the next phase of market development.
Most observers expect China to continue in the short-term with the case-by-case approach to approval taken so far, allowing two or three other banks to work on pilot programs rather than opening up the market to all financial institutions.
While that may disappoint many, particularly smaller Chinese banks who have a real need to fund themselves through securitization, the authorities are unlikely to abandon the conservative approach they have taken when introducing any new financial product.
It has not been decided which banks will get the go-ahead for the next batch of deals. In recent months, the likes of Agricultural Bank of China, Bank of Shanghai Merchants Bank, Misheng Banking Corp. and Pudong Development Bank have announced their intention to securitize.
Although corporates are excluded from the officially recognized securitization market, several have already completed quasi-ABS deals under the Customer Asset Management Plan (CAMP).
Five such transactions, which are listed on various exchanges and consequently fall under the remit of the China Securities Regulatory Commission (CSRC), have already been completed. China United Telecommunications kick-started the market in September 2005, with a RMB3.2 billion deal backed by revenues from the leasing of its mobile network.
Unicom has subsequently been followed by Guandong Toll Road, China Netcom, International Fareastern Leasing and most recently by Huaneng LanCang River Hydro-Power.
The reasons for the surge in corporate activity through the CAMP vehicles are straightforward. Up until recently, corporates were largely dependent on bank loans for funding. CAMP deals have offered savings of around 200 basis points over bank financing.
In addition, the CSRC approval process is short and swift compared to bank securitization. There is also no shortage of institutional investors prepared to buy the securities.
However, while these transactions bear some similarities with traditional ABS structures - especially in terms of designating specific underlying assets - they are not the full package.
To date, all the deals have carried an unconditional guaranty, either from a bank or parent company. Consequently, investors are participating on the strength of the guarantor, rather than the structure and credit enhancement of the transaction.
In addition, there is less certainty over the accounting treatment in CAMP issues. "In these deals, the issuer is a securities company that is not governed by trust laws," explains one banker. "So the assets are not actually pulled off balance sheet, which leaves real consolidation risk."
In an ideal world, corporates and financial institutions would be governed by the same rules, enabling corporates to benefit from the tax and accounting benefits accrued to banks.
According to a reliable source, this is something the Chinese authorities are considering, although regulatory consolidation may be years away.
"I've heard on good authority that State Council officials have met with regulatory officials in Beijing, so there is high-level awareness of this issue," the source says. "The PBOC is very important in terms of setting the rules and introducing new products, many of them which traded on both the interbank market [where ABS deals are sold] and the exchanges [where CAMP deals trade]. The discussions have focused on consolidating the process - combining the interbank bond market and exchange market - to fall under the CSRC's remit, although this may take a long time."
Until that happens, there will be no shortage of corporates following the CAMP path. Already there are signs the market is evolving, with tenors stretched out from one year (in the Unicom issue) to five years in recent transactions. Some upcoming deals may also be structured without guarantees.
Huaneng LanCang, a subsidiary of Huaneng Power International, has completed China's first deal backed by electricity sales from a RMB15 billion program arranged by China Merchants Securities. The offering, listed on the Shenzhen Stock Exchange, features a guaranty from Agricultural Bank of China.
The RMB2 billion debut issue comprised three senior tranches. Pricing ranged from 3.57% on the three-year fixed-rated piece to 180 basis points over the seven-day Interbank repurchase rate for the five-year floater, equivalent to 3.6% on a fixed basis.
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