Fitch Ratings last week revealed it expects China to generate further issuance of collateralized debt obligations in 2006, following the completion of the country's first CDO by China Development Bank at the end of 2005 (ASR, 1/9/06).

Charles Chang, Fitch's Asia-Pacific director of structured credit, said there are several factors leading the push for new transactions, particularly the need for risk management.

"Chief among these reasons is the need to reduce the concentration of risk in the country's banking system," he said. "This has become substantially pronounced in recent years as China increasingly relied on bank credit to fund its economic growth."

Activity is likely to be slow in the short term. The principal reason for this is the ultracautious regulatory procedure, with issuers having to satisfy the criteria of several regulators before they can launch deals.

"There will likely be a few deals a year until the government transitions to a rules-based approach in regulating and approving CDO issuance, following which, the market should grow at an accelerated pace," Chang said.

Synthetic structures limited

Chang said activity in the near future will most likely involve cash balance sheet offerings, with synthetic structures limited by regulatory issues and an underdeveloped credit default swap market.

Sources say CDB is planning a follow-up RMB5.8 billion deal ($720.3 million) in the first half of the year and another RMB10 billion ($1.24 billion) issue toward the end of 2006. One of those deals is likely to involve a pool of non-performing loans.

Fitch believes at least one other top-tier bank could complete a deal in 2006. ASR understands foreign securities firms are also trying to secure business from smaller, second-tier Chinese banks.

CDB's maiden RMB4.2 billion ($521.6 million) CLO was collateralized by 51 infrastructure loans to 29 borrowers. The RMB2.924 billion ($363.3 million) senior certificates, rated AAA, were offered at 2.29% for a 0.67-year average life, with the RMB1 billion ($124.3 million) junior piece pricing at 45 points over the one-year deposit rate (2.25%) for 1.15 years.

The fact that 71 institutions submitted orders for a new product highlighted one other factor encouraging issuance: there is huge investor demand in China, which can only benefit issuers in terms of pricing.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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