Moody’s Investors Service today put out a report saying that listing Chinese collateralized loan obligations on local stock exchanges would be a boon to bank issuers.
The note was curiously timed as Chinese bourses, including the Shanghai and Shenzhen exchanges, have been going through extreme volatility. A drop of indices of about 30% over the last three weeks has reportedly erased over $3 trillion in equity value,
Anxiety is rising of an unsustainable bubble as retail investors have piled in to the market, with many buying stocks on margin.
So far, no Chinese CLOs — which pool corporate loans into a single deal — have been listed on stock exchanges. Their platform is the interbank bond market, less liquid and with a narrower investor base than the bourses.
Unlike in the U.S., where CLOs are placed by collateral managers that have sourced bank loans, Chinese CLOs are directly issued by banks.
Moody's said that “Cross-listing” on a Chinese exchange other the interbank market should compress yields on securitizations in secondary trading, which would feed back into primary-market pricing for future issuance.
Tighter pricing on the riskier notes in the CLOs would particularly improve the economics of a deal for issuers.
“Most of the credit risk of the underlying assets is concentrated in these subordinate tranches that support the senior most tranche’s higher credit rating and lower yield,” Moody’s said.
The rating agency suggests that non-bank investors could push up demand for just these tranches. The buyer base would expand to include securities brokerages, fund managers and foreign financial institutions that are now outside the interbank bond market.
Moody’s sees another advantage: the diversification of risk. With activity restricted to the interbank bond market, banks themselves tend to be the major buyers of CLOs. This keeps the risk of loans originated by banks within the banking system, instead of spreading it to non-bank investors. In the U.S., institutional investors are the main investors in CLOs.
Regulators have already
There are already non-CLO securitizations listed on Chinese exchanges. The PingAn ABS, a CNY2.63-billion securitization of small loans to consumers, was listed on the Shanghai Stock Exchange on June 25, 2014. But trading has been scant, with only six trades totaling RMB19 million so far, and they’ve all been in the CNY1.21-billion A tranche.
Moody’s said the minimum trade for securitization deals is CNY1 million — this could be too rich for a large number of the mom-and-pop investors who have stampeded into the stock markets in the last few months.
In a bid to stem the equity-market panic, the Chinese government has aggressively intervened over the past week, setting up a stabilization fund with contributions from brokerages as well as implementing other measures. The effort so far hasn’t stopped the market from falling further.
There are obstacles to listing CLOs as well as other types of securitization on exchanges. For instance, which depository will keep records for holders and perform other clearing and settlement functions.
For the bond market, those functions are performed by the China Central Depository & Clearing Co. (CCDC), for the Shenzhen and Shanghai exchange it’s ChinaClear. While the two platforms collaborate in “cross-market custody transfers” this has yet to be applied to securitizations.
