China banking regulator rules may spur ABS

Thu Apr 17, 2014 5:51am EDT

* Banking watchdog allows for leasing securitisation

* Rules also strenghthen leasing guidelines

* Other regulators, though, have to approve deals too

By Nethelie Wong

HONG KONG, April 17 (IFR) - New rules from the China Banking Regulatory Commission may jumpstart the market for securities backed with financial leasing assets, though hurdles other regulators have put up, as well as high financing rates, are likely to limit its growth.

The CBRC recently amended its rules to encourage new entrants - both domestic and foreign - to the financial-leasing business and to allow them to access a wider range of sources of capital for funding, including securitisation.

Until now only the China Securities Regulatory Commission has approved leasing ABS issues. Leasing companies, however, are also answerable to the CBRC as well as other regulators, ultimately meaning even CSRC-approved ABS deals from the sector have not seen the light of day.

Such mixed messages from different regulators point to the problems China faces in developing a robust local bond market, where it is still not always clear which regulator has what authority. WELCOME CHANGE

Still, although the new CBRC rules do not remove all barriers for leasing companies, market participants generally welcome them as a move in the right direction.

"Amendments to rules for financial-leasing companies in China look set to make leasing ABS deals possible there," said Helen Wong at Fitch Ratings.

"The regulatory framework for securitisation in China continues to develop, and this may bring to the market new asset classes, including equipment leases and aircraft leases," Wong said.

In Wong's opinion, in addition to facilitating securitisation, the CBRC rules strengthen the operating environment for leasing companies and limit the risk of originator and servicer defaults.

The guidelines also include tighter supervision and management of capital adequacy ratios.

Stronger requirements are likely to give investors in leasing ABS more comfort in the structure, sources say.

Securitisation professionals said several attempts by leasing companies in the past two years to sell ABS failed because issuers were not able to get all regulators involved to approve the offering.

ICBC Financial Leasing, for instance, received the blessing of the CSRC for an ABS issue in late 2012, but the company was unable to get necessary endorsements from other authorities before May 2013, when the CSRC approval expired.

China had more than 20 financial-leasing companies with Rmb900bn of assets as of the end of June 2013. ICBC Leasing is estimated to have assets of about Rmb150bn.

STILL WARY

The CBRC's rule change is appreciated, but market participants remain wary.

"I hope this time all the authorities are willing to keep the doors wide for leasing companies to make ABS a regular source of funding," said a securitisation banker.

Another deterrent to the market's growth are high domestic interest rates.

In the past, ABS transactions allowed corporate borrowers to save as much as 200bp over China bank lending rates.

Since mid-2013, though, domestic interest rates have risen significantly. Corporate borrowers need to pay higher rates on ABS issues, in addition to the typically higher transaction costs associated with the asset class.

Bank of China priced a three-tranche Rmb9.38bn ABS in late March. The issue included a Rmb7.693bn tranche A, priced to yield 6%, and a Rmb891m tranche B, priced to yield 6.98%. At the time, central bank benchmark lending rates were at 6.15% and 6.4%, respectively, for similar tenors, suggesting the ABS provided little savings.

The fact offshore bond and loan markets are receptive to senior debt from Chinese leasing companies also means borrowers have other avenues available for financing. ICBC Financial Leasing is in the process of syndicating a US$300m three-year transferable term loan for its Hong Kong subsidiary. The bullet loan pays an all-in rate of 225bp over Libor, translating to about 4.375% in renminbi, assuming mid swaps.

Last Wednesday, Bank of Communications' financial-leasing arm priced a five-year US$500m bond to yield 175bp over US Treasuries, which translates into an even lower yield in renminbi. (Reporting By Nethelie Wong; editing by Christopher Langner, Abby Schultz)

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