Australia's Macquarie Group was last week linked with what would be China's first commercial mortgage-backed securitization. According to local media, Macquarie is preparing a RMB1 billion ($124 million) deal that will be secured by its interests in several properties located in Mainland China.
These include the nine shopping malls Macquarie bought in July 2005 for $93 million, as well as equity holdings in at least three other properties.
Initially, Macquarie wanted to transfer ownership into a newly established Hong Kong real estate investment trust, Macquarie Wanda. However, the REIT ran into numerous legal and logistical problems, and Hong Kong's Securities and Futures Commission denied approval earlier this year.
Consequently, Macquarie has decided to go down the conventional CMBS route. Although the company could not be reached for comment as of press time, one reliable market source said the suggestions in the local media that the deal would be issued in China's domestic bond market were inaccurate.
"As I understand it, the loan to fund Macquarie's acquisitions was made offshore," the source explains. "As the assets are held by an overseas entity, there is no legal requirement for Macquarie to go through China's regulatory procedure. In all probability it will establish a Cayman Islands SPV to buy rights to the loan, and issue bonds to international investors."
With Chinese property developers willing to sell assets to free up capital; and no shortage of foreign buyers wanting to invest in the Mainland, if Macquarie is successful, other borrowers could follow suit.
"There is plenty of potential for foreign-currency CMBS involving Chinese assets," comments one banker. "This is especially so if buyers fund acquisitions in US dollars. In the event the remembi is revalued, that will make those purchases cheap in the long-run."
The banker did raise a note of caution, however. "In theory, if the deal is done offshore this should make loan enforcement easier," he says. "However, it's not absolutely certain the offshore structure would keep enforcement out of the Chinese courtroom. Secondly, there seems to be a major disparity between cash flows and the value of the properties. It seems all the upside is included in the current property price, and debt investors might have concerns about this."
Staying in the People's Republic, talk is that China's four state-owned asset management companies - China Orient, Cinda, Great Wall and Huarong - are working on separate non-performing loan securitizations. The AMCs were established in 1999 to address the crippling NPL situation in China's banking industry.
Although they have made huge progress, the government wants to ramp up the NPL resolution effort with China's financial industry due to open to foreign competition next year. A source said that at least one NPL ABS could be expected in 2006, with regulators likely to ease the normal approval procedures given the urgency of the situation.
Huarong already has experience in securitization. The AMC completed in June 2003 a quasi-ABS, which packaged an RMB13.25 billion portfolio of distressed assets into a single trust.
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