Given the high-level regulatory backing for China's two pilot securitization schemes, the mortgage-backed offering by China Construction Bank and China Development Bank's proposed infrastructure loan CLO (see ASR 3/7/05), most observers assumed one of those deals would be odds on to complete China's first securitization of performing assets.
Yet despite the suggestion of People's Bank of China, published in a recent report on the central bank's website, that Construction Bank is on course to complete its Rmb10 billion ($1.2 billion) MBS in the third quarter, another issuer could pip the bank to the post.
According to local media reports, China United Telecommunications is planning to raise up to Rmb3.8 billion in the near term, through short-term ABS paper. Local investment bank China International Capital Corp. is believed to be arranging the sale of six-month and one-year trust certificates, backed by revenue generated by China Unicom leasing its mobile network to its Hong Kong subsidiary.
The reports claim China International Capital is already having discussions with institutional investors - including several mutual funds - over pricing parameters. Yields are expected to come in between where one-year government paper currently trades (around 1.33%) and triple-A rated corporates (between 2.90% and 3%).
For those unfamiliar with Chinese media agents, it would be fair to say their knowledge of securitization is basic at best. There have been many reports of companies "imminently" launching deals over the past five years, but none have ever come close to fruition.
Consequently, it is best to treat the China Unicom story with a grain of salt. However, there are at least a couple of good reasons why this transaction may see the light of day, although it will not likely be anytime soon.
The first relates to the quality of the company. China Unicom, listed in New York, Hong Kong and Shanghai, is the second largest mobile phone company in China with a 33% market share. Its 2004 sales were over $9.5 billion and by the end of June the company had over 90 million registered subscribers. The numbers highlight China Unicom is a serious player, domestically and overseas, and would be unlikely to waste its time on such a venture if it did not believe it was achievable.
Secondly, negotiating China's regulatory maze in securitization terms currently appears to be easier for a non-financial entity than a bank issuer. Market talk indicates that China Unicom has already secured approval from the one agency needed to for this deal, the China Securities Regulatory Commission, the local equivalent of the Securities & Exchange Commission in the U.S. If true, as soon as investors receive backing to participate, the transaction could be issued immediately.
Compare this simple process to what both China Construction and China Development have to go through with their deals. China Construction, which is being advised by Standard Chartered, received approval in April after five previous proposals dating back to 1999 had been rejected. Even then, it took the 10 regulatory bodies that are overseeing the pilot schemes several months to reach a consensus. China Development, working with Lehman Brothers and Deloitte & Touche on its own Rmb10 billion offering, has gone through the same lengthy procedure.
Unless the regulatory process can be simplified, it is hard to see reasons why other banks would want to go through the hurdles to securitize, despite the People's Bank's claims that "securitization has great significance for developing China's financial market and maintaining financial stability."
In fact, the widespread optimism floating around earlier this year that China's long awaited ABS explosion was about to happen has diminished recently. Speculation is rife that the arrangers and legal teams assembled for the pilot deals are working for below-average fees. While there may be some strategic logic to this - involvement on the first, most difficult deals, could arguably secure involvement on future offerings by other issuers - this is conditional on a regulatory framework that facilitates, not hinders, issuance.
Deadlines for the China Construction deal have already come and gone. Although sources involved with the transaction considered the initial April deadline unlikely, completion in the first half of this year was believed to be an attainable goal. Furthermore, while the People's Bank may claim that the offering is still on course for a third-quarter launch, many market watchers are not so sure. Standard Chartered officials refused to comment last week.
China regulators are undeniably moving in the right direction, but according to one Hong Kong-based lawyer well versed in the Chinese legal framework, considerable work still needs to be done.
"The regulations are a step in the right direction, but are not complete by any stretch," the lawyer said. "Other measures need to be taken such as relevant tax regulations and rulings. The regulations are not complete in many respects and additional guidance is being sought, which is why neither of the two pilot deals have not been offered as yet. From a legal perspective, I still feel we will see a transaction being issued this year, but only if the economics are right."
Although the quest continues to launch the first performing asset ABS, both Huarong Asset Management and Industrial and Commercial Bank of China have in recent years completed transactions backed by non-performing loans (see ASR 4/19/04).
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