(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
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
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
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)