Chinas National Association of Financial Market Institutional Investors (NAFMII) has released draft rules for a securitisation instrument for non-financial issuers. Heres why this could signal the reopening of Chinas securitisation market.
NAFMIIs asset-backed medium term notes (ABN) are receiving a more positive response from the market than PBOCs asset-backed securitisation (ABS) instrument, announced in March.
While financial institutions are still waiting for their individual quotas in the 50 billion total in yuan ABS issuances, NAFMIIs ABNs are moving forward.
Counsel expect SMEs to take advantage of ABNs. Kingsley Ong of Eversheds Hong Kong told IFLR that corporates with a lower rating will be keen on the instrument because their financing costs will otherwise be high if they have a low rating. If they have good assets that they can put into ABNs, they will get cheaper funding, which will help their business model.
However sources have different opinions regarding the regulatory regime for ABNs. Roy Zhang, partner at King & Wood Mallesons, said that the process would be similar to that of CSRCs private placement programme. Though the SME programme from CSRC involves more straight debt, he said, he does not believe that there will be a significant difference in requirements for investors, terms of issuance or issuer qualifications.
But a partner at a Chinese law firm said because NAFMII is a self-regulated organization for the interbank market, its approval process may be easier than CSRCs. This may prove attractive to non-financial enterprises.
The partner added that NAFMIIs approval process is basically a quasi-filing system. Though there is a review committee from non-financial enterprises, people expect they will do the same non-substantive review as for other types of commercial paper.
A key issue unaddressed by the draft rule is how to isolate the assets secured from the originator. The partner commented that this instrument was put on hold two years ago because practitioners could not agree on a solution. Its a very difficult question under PRC law. For most originators, securitisation is future flow, or money that will be acquired. Issues include evidencing the transfer of receivables to a SPV and securing the transfer of future flow to the SPV to protect the interests of investors, said the partner.
A wait and see approach has been adopted in response to these concerns, and the problem will be left to lawyers and underwriters to untangle. It is impossible to address the problem under the current release, the partner added, because there are many types of asset classes for ABNs that cannot be generalized into one release.
Market infrastructure needed
Sources noted that China needed to develop the institutions for sophisticated bond markets. Zhang said that there have been lobbying discussions and preparatory work, but underwriters are still considering their possible involvement in having a leading role. The market is also looking for a package that will be appealing to international, domestic institutional or individual investors.
Zhang noted that Chinas security firms and banks do not have much experience on this front, and there is homework for them in terms of project structuring, distribution capabilities and back office functions.
Market infrastructure is another concern. Underwriters, law firms, rating agencies and account firms need to work together to recommend good products that are not only at an international standard, but also cater to the local investment environment, added Zhang.
Ong pointed out some caveats, such as the lack of a secondary market. It remains unclear as to whether a secondary market can develop quickly, he said. Were not sure what it will look like: if you buy notes, can you trade them easily and will they be as liquid as youd like?
A step towards RMB internationalization
The ABNs immediate impact is that it provides a much-needed alternative to traditional bank lending, which is the primary method of financing in China. From the regulators and banks perspective, they would like to encourage less reliance on bank lending to manage their own balance sheets and support the macro-environment, said Zhang.
But securitisation has been a sensitive topic in the Chinese economy. China launched a securitisation programme in 2005, but pulled back following the US subprime mortgage crisis in 2008. CSRC is again looking to securitisation as a way to reduce risk and respond to SME and private sector financing needs.
NAFMIIs ABN launch pressures other regulators to look at securitisation instruments. Zhang noted that insurance company regulator CIRC is asking others to provide recommendations for insurance companies to participate actively in the securitisation market.
Though Ong is unsure about how ABNs will fare in this economic environment, he said that the developments are in line with Chinas long-term plans for renminbi liberalisation and nationalisation. If the RMB is to become a freely tradable currency, there need to be safeguards to avoid a crisis such as the 1997 Asian financial crisi, Ong said. As part of that policy, the Chinese government is very keen to develop the debt capital markets and see securitisation as a key element.