China Construction Bank, one of the People's Republic of China's Big Four state-owned commercial banks, looks increasingly likely to launch its long-awaited pilot MBS in the first half of the year, sources familiar with the deal said last week.
April has been targeted as a launch date for the deal - China's first of potentially many MBS - that is being structured by Standard Chartered and Freshfields Bruckhaus Deringer as legal adviser. While April may be optimistic, June, at the latest seems an attainable goal.
"I am 50% confident of it happening in the first half," comments a source. "China Construction has been hearing good noises from the regulators so work has resumed with a view [that] it is actually going to happen. I have been in the region for 10 years, and securitization always seemed to be years away rather than months, as it seems now. This is the most hopeful I have been."
A 50% chance may not seem overly optimistic, but in the context of China's uncertain regulatory framework and China Construction's trials over the years trying to securitize, it is about as positive as anyone could expect.
When first theorized more than five years ago (see ASR 8/9/99), seasoned ABS professionals in Asia expressed skepticism that any transaction could be done in China, pointing to the lack of a specific ABS law, uncertainty over tax and accounting treatment, issues with bankruptcy remoteness and local corporate law not recognizing special purpose vehicles in relation to securitization.
Some of those issues remain unresolved - particularly on the ABS law - yet even neutral observers seem confident China Construction's latest proposal, its sixth since 2000, will succeed.
The mood shift seems to have resulted principally from a changing attitude in the highest levels of Chinese bureaucracy. "The good thing now is there is no one at a senior level of China's regulators who is against ABS," agrees one head of Asian ABS at a U.S. bank. "You just need to put enough pressure on the regulators that matter to get the information to make a deal work."
Crucially for China Construction, it seems to have the backing of the State Council, the agency responsible for the day- to-day running of the PRC and has the final vote on projects worth over $100 million. or those deemed being of national importance.
When China Construction presented its latest proposal last September before nine regulatory bodies - amply demonstrating how much red tape needs to be breeched to get things done in China - the State Council is believed to have told China Construction words to the effect of: "this has been in the works so long, it's about time we get this done," reported a source close to the situation.
Meanwhile, other issuers are busy readying their own transactions. China Development Bank's proposal for a deal backed by infrastructure loans via Lehman Brothers has also been approved. Additionally, reports suggest that China Development is also looking at establishing a secondary mortgage company that will fund itself entirely through securitization. Shanghai Pudong Development Bank is another entity rumored to be lining up a securitization.
Another fundamental difference between now and 2000 is that intermediaries are focusing on working with China's existing laws rather than hoping wholesale ABS legislation will be introduced. To illustrate how slow China's legislative process can be, amendments to its bankruptcy laws, for example, have been 10 years in the making.
It is possible, however, to put together a recognizable securitization using the Trust Law. In fact, a precedent has already been established by Industrial Com-mercial Bank of China's Rmb820 million (US$99 million) NPL transaction, completed in June 2004 (see ASR 4/19/04). The deal, arranged by Credit Suisse First Boston, transferred a pool of loans off balance sheet and shifted the risk to investors, two of the bank's main ambitions for the issue.
China Construction will use a similar structure, and although there are some concerns over the assignment of mortgages to a trust - something not covered in the existing laws - bankers feel this should not present much problem in light of the improved regulatory situation. If the State Council wants to give special approvals - and sources report that it does - it may do so.
As things stand, trusts are by no means a perfect structure in China, particularly on the supply side, as there are strict rules as to who can purchase them. Financial institutions and insurance companies, for example, need special approval from the government to purchase the certificates and by all accounts, only corporate buyers and high net-worth individuals purchased Industrial Commercial Bank's certificates.
If the trust certificate investor restrictions are eased, the scope for issuance is massive. The bank mortgage sector is estimated to be worth $142.3 billion, yet only accounts for 9% of a bank's overall lending on average.
Investors are desperate for alternatives to bank deposits, government bonds, the limited number of corporate bonds and the equity markets. Importantly, banks are looking at securitization as a way of improving capital management. This issue has assumed critical status in China, due to the country opening up its banking sector to foreign competition at the end of 2006, plus the need to be Basel II compliant.
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