BoCom sets template for China ABS
(This article originally appeared in the Nov 3 issue of IFR Asia Magazine, a Thomson Reuters publication)
* BoCom prices first true-sale ABS in four years
* Banks only hold 5% of the deal, no additional capital
* Deal sets template for securitisation in China
By Nethelie Wong
Nov 5 (IFR) - China's first securitisation of commercial banking assets in four years has presented an attractive risk management solution to the country's biggest lenders.
Bank of Communications last week priced its Rmb3bn (US$476m) domestic securitisation - the first from a commercial bank since 2008. Policy lender China Development Bank reopened the market for collateralised loan obligations under the latest pilot scheme for asset-backed securities in September.
The deal not only marks a debut for BoCom, but also proves that a domestic securitisation can be economical and a useful tool for China's banking sector.
China's banks are under pressure to increase lending to prop up the economy, but remain constrained due to tougher capital adequacy rules. BoCom's deal, therefore, could provide a template for banks looking to reduce capital provisioning on their loan books through the use of off-balance-sheet financing.
Domestic banks have financed their growth through equities and bond issues in the past decade, and have pretty much reached both their fundraising and lending limits. Now, the Chinese Banking Regulatory Commission seems to encourage banks to use ABS as a portfolio management tool on the asset side, lessening the need for expensive capital raisings.
The CBRC's newest securitisation rules require each originator to retain an equity tranche equal to at least 5% of the deal, while the holding period must be longer than the lowest-ranked tranche. That is in line with prevailing international standards that had been revised after the 2008 financial crisis.
In other words, a domestic securitisation can now be a "true sale" with bankruptcy-remote features. An originator needs only to put aside provision for capital with a minimum of 5% as subordinated tranche, while 95% of the deal can be removed from the balance sheet.
"The 5% retention requirement is very important because the rule aligns the interests of the originating bank and the investors," said Kyson Ho, head of structured finance, Asia-Pacific, at HSBC.
That provides a very appealing incentive for banks that are near their lending limits as ABS will help free up lines for new loans. Chinese banks have long been lobbying for such a tool to manage their loan portfolios.
The BoCom deal comes with an unrated subordinated portion of around Rmb263.55m, or 8.69% of the total. The larger-than-required sub piece was designed to give comfort to investors, and the sellable tranches drew decent levels of demand.
The BoCom deal comprises Triple A rated A1 notes of Rmb850m, priced at 4.2%, Triple A rated A2 notes of Rmb1.6bn and Single A rated B notes of Rmb310m priced at 4.4% and 6.0% for the first interest rate periods of the A2 and B floating-rate tranches, for average lives of 0.48, 0.82 and 1.5 years, respectively.
Given that the weighted average interest rate was 6.30% for a weighted average remaining tenor of 0.91 years from the underlying assets, it is quite obvious that the deal makes commercial sense.
Among the tranches, the soft-bullet A1 tranche was the most popular as it appealed to a wide range of investors. The A2 and the B tranches are pass-through certificates, attractive mainly to banks. In fact, the mezzanine tranche, and even the subordinated tranche, saw more interest than in the past as domestic institutional investors have become more sophisticated.
In the new pilot scheme, the investor base has been gradually expanding to include insurance companies, investment funds, corporate pension funds, national social security funds and other approved qualified non-bank institutional investors.
In the past, banks were the only major investors. Securities funds played only a small role in the ABS market in China. The China Insurance Regulatory Commission gave its approval for insurance companies to participate in ABS deals on October 26. BoCom is the lucky one as it is the first ABS trade to benefit from the new rule.
Originator and servicer BoCom has chosen Haitong Securities, as well as Guotai Junan Securities and Citic Securities as joint lead managers of the deal. Zhonghai Trust acts as trustee, while HSBC is the financial adviser. (Reporting By Nethelie Wong; Editing by Steve Garton)
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