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China tries to cool ABS fever
[HONG KONG] After a near quadrupling of securitisations on China's stock exchanges in 2015, Chinese regulators are shifting their focus to risk control, sending out early warnings as new instruments emerge backed against more exotic assets.
The Shanghai Stock Exchange issued notices to securities firms late last month, urging them to strengthen risk management on corporate bonds and asset-backed securities, according to three sources, who received the notice.
The bourse took securities firms to task for insufficient due diligence and loose risk management. In particular, it asked them to boost offerings from high-quality firms and assess underwriting risks from companies in coal, steel, real estate and other sectors with overcapacity.
Although no risk event has emerged with stock-market ABS so far, market participants say investors need to watch out for any deterioration in the underlying assets and cashflows as China's economy slows.
Some see the SSE's warning as a sign that regulators are concerned underwriters have moved too quickly down the credit curve in their efforts to develop the market.
While the first ABS issues were seen as relatively high quality, the supply of good assets dried up over time.
One source interpreted the notice as a warning on the uneven quality of underlying assets used in securitisation and the competence of some securities firms in managing ABS.
"Some securities firms lack the expertise to underwrite ABS," he said. "They copied the documents from each other and overlooked some credit risks." ABS most immediately at risk include those backed with receivables in the coal and steel sectors, with analysts also pointing to risks in some ABS transactions that have channeled funds to some highly leveraged local government financing vehicles.
ABS issuance on China's stock exchanges soared 384 per cent in 2015 to 194.1 billion renminbi (S$41.2 billion) following the China Securities Regulatory Commission's major relaxation of regulations in late 2014. In essence, any company proven to have stable cashflows was cleared to issue ABS by registering the securities with the stock exchange.
As with other corporate bonds under the CSRC's purview, stock exchange ABS are arranged mainly by securities firms and asset managers, as opposed to securitisations of financial assets in the interbank market under the supervision of the China Banking Regulatory Commission.
Rental income, fees from infrastructure services, such as road tolls, and company receivables were the majority of assets underlying stock exchange ABS, composing 28 per cent, 25 per cent and 13 per cent respectively, according to China Central Depository & Clearing Co.
However, ABS assets have also included small loans to e-commerce vendors and even college students.
In 2015, Zhejiang Alibaba Small Loan, a subsidiary of Alibaba Group, originated several ABS transactions backed against small loans granted to vendors across its e-commerce trading platforms, including Taobao and Alibaba.
In January, online consumer financing start-up Fengqile.com raised 200 million renminbi through an offering of securities backed against consumer loans to college students.
Other securities have cinema box office sales, amusement park ticket revenues, as well as tuition fees, as backing.
Kong Kong-listed cinema operator SMI Holdings Group issued the first securities backed against Chinese box-office receipts in early August 2015, to raise 1.35 billion renminbi, and Nan Hai Corp followed this month with a 1.13 billion renminbi transaction.
Kunming University of Science and Technology sold the first securities backed against tuition fees and accommodation fees in November. The ABS with maturity of nine years was issued at a coupon of 5.47 per cent.
"What we call corporate ABS in the Chinese stock exchange market are more like whole business securitisations in the West. In essence, those ABS backed by future revenues can be seen as corporate bonds collateralised by originators' rights to incomes," said the source.
The explosive expansion of stock-exchange ABS will not be repeated this year, yet growth will be at a decent rate as ABS is still appealing to both investors and issuers, market participants say.
At a time when the benchmark 10-year Chinese government bond yield has fallen to 2.89 per cent, its lowest since 2009, corporate ABS offer much higher returns to investors thanks to premiums paid for lack of liquidity and perceived risks associated with innovation.
According to Pan Jie, head of fixed-income research at Sinolink Securities, senior ABS tranches in the exchange market carry an average yield of 6.10 percent with an average tenor of 2.83 years, which is 190bp higher than MTN with identical maturities and ratings. He recommends investors should ramp up their ABS holdings as early as possible, expecting yields to narrow this year.
Incentives for companies to issue ABS remain strong too, as a rule limiting outstanding debt to 40 per cent of an issuer's net assets does not apply to ABS issuance.
"Last year was the great leap forward for the stock-exchange ABS, but this year the pace will be more moderate," said a Shanghai-based underwriter with a securities firm.