Following the successful completion last December of two government- supported securitization schemes from China Construction Bank and China Development Bank (ASR, 1/9/06), barely a week goes by without another Chinese entity being linked to a deal.
Most of the speculation surrounds the country's 13 second-tier banks, otherwise known as shareholder banks. Minsheng Banking Corp. and Pudong Development Bank have been connected to residential mortgage-backed offerings, while Bank of Shanghai and Merchants Bank have been touted as potential issuers.
With China's ABS market still in its infancy, these banks are seeking out international banks to help put deals together. Although fee income will be limited by the fact that most global securities firms do not hold local underwriting licenses in China, they still have an important role to play as financial advisors.
Citigroup, along with Calyon Securities, Deutsche Bank, Lehman Brothers and Standard Chartered, are seeking opportunities in China. According to rumors, Citigroup is working with Merchants Bank on a deal, and is bidding with Standard Chartered to advise Pudong Bank on a RMB3 billion ($373.1 million) MBS. Also, Citi is looking to increase its stake in Pudong from 4.6% to 19.9%.
John Dahl, Citigroup's head of Asian securitization, would not comment on the speculation, but admitted the bank has high hopes for China.
"We can't comment on anything specific, but we are working on a couple of things. The good thing about China is that it is a question of when, not if, the market will take off," Dahl said. "Two deals were completed last year and they were wildly successful. There are two data points now and interest is increasing."
One point of concern to arrangers is the ultracautious attitude of China's regulators. Some bankers feel too much focus is on the country's "Big Four" state-controlled banks - Agricultural Bank of China, Bank of China, CCB and Industrial Bank of China.
There is a sense these banks get priority treatment from regulators, while the plans of the smaller players - who have a greater need to securitize for funding purposes - are considered secondary.
"In the short term, issuance will be impacted by the approach taken by regulators," Dahl said. "Understandably they are taking a cautious approach, but we understand they are in the process of evaluating the performance of the two deals, and will at some stage make a statement on how the next phase [of issuance] should take place."
It is likely the key regulators - People's Bank of China and the China Banking Regulatory Commission - will announce a shortlist of the next issuers, continuing to approve deals on a case-by-case basis rather than adjusting legislation to allow all borrowers to do deals at any time.
Despite this, Dahl remains bullish on certain sectors.
"We are extremely enthusiastic on two asset classes: real estate and consumer loans, primarily because there is an abundance of both," he said. "As far as real estate goes, one real positive is the willingness of sponsors to sell their portfolios. It is possible we will see assets being sold down either through real estate investment trusts or through traditional CMBS structures.
"When referring to consumer finance, we're really talking about residential mortgages. There are a few originators with significant portfolios. It might be too early for auto loans and credit cards as those markets are still relatively new."
China Development Bank's debut was backed by a pool of corporate loans. Dahl believes similar transactions could emerge.
"Corporate loan securitization will be big at some stage, although the concentration in specific industries is problematic, so you would need to deal with exposure issues," he said.
There was a brief flurry of offshore deals completed in the mid-'90s, the most notable of which was completed by China Ocean Shipping Company. Dahl does not dismiss the possibility of this occurring again, depending on certain conditions.
"There will be some cross-border opportunities, especially if the flows are being generated offshore, although this will come down to whether the economics work," Dahl said. "It will be more problematic doing cross-border deals with renminbi assets, however, due to restrictions on selling assets offshore. We will also need to see more sophistication in derivatives products to enable cross-currency swaps."
Future market participants
Potential issuers will not just come from the banking sector. Huaneng Power International has secured shareholder backing for a RMB15 billion ($1.9 billion) asset-backed program, with a first deal expected in the first quarter of 2007 (ASR, 2/6/06). Analysts say securitization will save the company RMB200 million ($24.9 million).
Local media have reported that two of Huaneng's competitors, Datang International Power Generation and Huadian Power International, want to execute transactions. As with Huaneng, the two companies believe securitization offers cheaper funding than bank loans and will result in higher ratings.
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