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Chinese developers come home to asset-backed securitisation

[HONG KONG] China's property developers are returning to the asset securitisation market after a three-year absence, prompted by lighter rules on how they can package up and sell future cash flows to raise funding.

Shimao Property Holdings, a major developer, has packaged its future management fees into an asset-backed securitisation worth 1.5 billion yuan (US$243 million) which will start trading next week.

The success of this funding deal could attract followers into China's securitisation market, emboldened by April's change in rules allowing companies selling asset-backed securities (ABS) merely to register with the central bank, rather than having to seek regulatory review and approval as in the past.

It also could help fulfil the property sector's search for cheaper and more diverse sources of funding as it tackles slowing sales and squeezed margins.

Shenzhen-based Bosera Asset Management Co has structured the deal which it said comprises five tranches with a maximum 5-year maturity and a coupons paying between 5.5 per cent and 7.1 per cent, and had been fully subscribed by banks.

"We're also talking to Shimao about securitising its hotel room income and car park fees, but it's not confirmed yet," said the official, who asked not to be identified as he was not allowed to speak to the media.

The last known deal in which future flows in the real estate sector were securitised was in 2012, when state-backed Shenzhen Overseas Chinese Town packaged and sold its theme park admission ticket receipts, issuing securities worth 18.5 billion yuan.

"In China, overall refinancing channels for the real estate industry are limited," said Rainy Du, a partner at Beta Consulting Company.

"As the requirements for issuing asset-backed securities (ABS) were lowered, more new products are expected in the market."

Ms Du said developers had previously raised funds mainly through less-regulated trust products, which pool money from cash-rich individuals and companies to make high-interest loans, and are at the heart of the China's vast and opaque shadow banking system.

"But you can't pay just 5.5 per cent on a trust product because it's also sold to retail investors who seek a higher return," she said, adding the lower yields might encourage more developers to issue asset-backed securities.

Typically, ABS products could include all forms of receivables, be they from property sales or management fees.

China's securitisation market had new issues totalling US$45 billion last year and is set to grow 50 to 100 per cent this year, rating agency Moody's Investors Service forecast. New issuance in the first quarter was US$17.7 billion.

Even at interest rates as low as the 5.5 per cent which Shimao offers on its cheapest tranche, returns are higher than the average 3.78 per cent offered on preference ABS in the second quarter, reflecting the higher risk premium demanded by investors for Shimao's securitisation, even though it is AAA-rated by Moody's local affiliate China Cheng Xin International Credit Rating.

In the event of a default, preferred ABS investors have the right to be paid out of the borrower's underlying assets first.

Though ABS are known to generally have a lower risk of default, the recent stock market rout might make investors more wary of such products.

"Innovation is not easy, because investors will not be familiar with the new product," said Zhao Xijun, deputy dean of the School of Finance at Renmin University of China.