According to the latest reports from the People's Republic of China, the next wave of pilot securitizations by financial institutions (FIs) is likely to focus on non-performing assets.
The central bank, People's Bank of China (PBOC), and the China Banking Regulatory Commission (CBRC) - the two bodies that regulate asset-backed issues by FIs - have met twice in the past month with prospective issuers to discuss their proposals.
Sources have said that two asset management companies (AMCs) and five or six banks are in line to follow China Construction Bank and China Development Bank, who completed the first two pilot transactions in December last year (ASR, 01/09/06).
Some local media outlets have already reported China Orient Asset Management Corp. has received approval for an RMB8 billion ($1 billion) deal backed by NPLs. Meanwhile, Cinda AMC is known to be the other AMC pitching.
Both are among the four AMCs established in 1999 to resolve the bad loan situation afflicting China's financial system.
Deal makers familiar with the current round of discussions between regulators and issuers say the talk surrounding China Orient is premature. "There will be a second round of pilot schemes, which PBOC is heading," says one banker. "Several institutions - including China Orient - have submitted proposals, but none of them has got approval yet."
Even so, one Beijing-based lawyer said the AMC's securitization plans are at a more advanced stage than the banks, making them more likely to get regulatory backing. "All the banks that are interested in participating have only just begun the process of selecting financial and legal advisers," he stated. "It is likely that the only deals to get launched before the end of the year will be the NPL transactions."
Disappointingly for international arrangers, both AMCs have appointed local advisors. China Orient is working with Yinhe Securities, while Cinda hired China International Capital Corp. The latter has been involved on a number of corporate ABS deals in the past year, which use the customer asset management plan structure and are regulated by the China Securities Regulatory Commission (CSRC).
With China's accession to the World Trade Organization dependent on opening its financial sector to foreign competition by 2007, the NPL issue has found itself further up the agenda in 2006. Senior government officials have publicly advocated securitization as part of the resolution effort.
Consequently, it would be no surprise if Agricultural Bank of China (ABC) is also given approval to securitize distressed loans. The bank is one of the so-called Big Four state-owned banks along with Bank of China, China Construction Bank and Industrial and Commercial Bank of China (ICBC).
While the other three institutions have been largely successful in shifting bad debts off their balance sheets, ABC's NPL ratio was still 26.2% at the end of 2005, equivalent to $93 billion. While it has been speculated ABC may need a government equity injection of around $70 billion, the authorities want the bank to play a significant part in the restructuring.
ABC recently issued a statement in which it revealed plans to securitize corporate loans and mortgages from branches in the Jiangsu and Zhejiang provinces. In the statement, ABC added it was in the process of selecting a trust company and financial advisors for the program.
Presuming at least one NPL deal gets approved; it would not be the first time distressed debt has been securitized in China. Another AMC, Huarong Asset Management Company blazed the trail in June 2003, with a deal backed by RMB13.25 billion worth of loans. ICBC followed suit when it completed a RMB2.6 billion transaction arranged by Credit Suisse in May 2004 (ASR, 04/19/06).
Both transactions were crucial in establishing the template for securitization by FIs in China. Rather than aiming to launch deals via special purpose vehicles - which the authorities did not recognize as viable for securitization - Huarong and ICBC utilized the trust laws to good effect. Even so, as both carried unconditional guarantees from the sellers, there is debate whether investors were attracted by the underlying structures.
Sources say ICBC is one of the other banks wanting to do a pilot scheme, this time securitizing performing assets, with Bank of Shanghai, China Development Bank, China Merchant Bank and Pudong Development Bank completing the list.
Staying in China, Datang International Power Generation last week confirmed plans to raise RMB4 billion through an ABS offering. The deal, subject to approval from the CSRC, would be listed on the Shanghai Stock Exchange.
Datang, one of the PRC's biggest independent electricity producers, says the transaction - coupled with an RMB4 billion straight debt issue - will help reduce its annual interest rate expenses by between RMB80 million and RMB100 million.
Due to huge investor demand, coupons on corporate securitizations in the past year have been around 150 basis points inside bank loans. However, despite a lengthy pipeline of potential borrowers, activity in the short-term remains restricted by the slow approval process.
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