Global automakers are bringing international standards to China’s nascent securitisation market and domestic transactions are on the rise.
Source: REUTERS/Kim Kyung-Hoon
China’s structured finance market has made a great leap forward this year, with more domestic securitisations in the first six months than in the previous nine years combined.
Sales of asset-backed securities reached Rmb81.3bn (US$13bn) in the first half of this year, more than the total of Rmb74.7bn issued before the end of 2013. This year’s uptick has more than quadrupled outstanding volumes, with just Rmb17.1bn in circulation at the end of 2013.
China allowed the first ABS pilot issues in 2005, but most domestic securitisations have come in the form of collateralised loan obligations from the country’s major banks. Over the past two months, auto-loan financiers have entered the market, with foreign-owned originators involved for the first time.
“The opening up of auto-loan ABS market is good news to both auto financing companies for better funding costs and customers for better borrowing rates,” said Patrick Steinemann, co-head of Asia industrials investment banking at Bank of America Merrill Lynch.
“Auto financing companies will be in a stronger position to compete with banks.”
A deeper structured finance market will substantially reduce the reliance of auto-financing companies on bank loans – something that China’s regulators have been working hard to achieve.
This February, the China Banking Regulatory Commission granted quotas totalling Rmb5bn (US$826m) to six non-bank financial institutions to issue auto-loan securitisations.
“The opening up of auto-loan ABS market is good news to both auto financing companies for better funding costs and customers for better borrowing rates. Auto financing companies will be in a stronger position to compete with banks.”
Among others, foreign-owned auto-loan lenders, including the local units of BMW, Volkswagen, Ford, Nissan and Toyota, were allowed to sell ABS, in a sign that the domestic markets are opening up to overseas issuers.
As global auto lenders enter the ABS arena in China, they are also helping to shape and develop the new market.
Volkswagen Finance’s inaugural Rmb796m (US$130m) Driver China One securitisation, priced on July 21, is the first securitisation of Chinese auto-loan receivables to receive international credit ratings.
The structure closely follows VW’s global Driver standard. The issue will settle on August 1 in the domestic interbank bond market.
“International ratings help to expand the investor base of a domestic securitisation as many foreign investors have rating requirements to meet. The ratings help in evaluating the transaction and facilitating purchases,” said Jerome Cheng, senior credit manager at Moody’s.
“As the investor base grows, the pricing may be improved.”
The new ABS was made available to international investors allocated qualified financial institutional investor or renminbi qualified financial institutional Investor quotas, as well as foreign banks in China and regular domestic investors.
“Having international ratings, knowing the management practice of the foreign firms and seeing the familiar ABS format will all give more comfort to foreign investors,” said one banker.
In fact, pricing of Triple A rated tranches of foreign auto-loan ABS has been falling. Ford Motor paid 5.5% for a tenor of 0.68 years in late May, but BMW paid only 4.8% for a tenor of 0.55 year with same rating in mid-June. That reflected a better understanding and growing acceptance of the format among a growing investor base.
Almost every auto-financing major in the world has its own ABS platform as an important source of funding, and foreign players are happy to extend that practice to the largest global auto market.
In the VW structure, there is an overcollateralisation equivalent to 0.5% of the issue size – a departure from traditional PRC transactions. That provides an extra level of credit support to the issue.
Driver China One also comes with a prefunded reserve account equivalent to 1.2% of issue size, to provide protection in the event of servicer replacement or disruption. Earlier Chinese deals featured reserve accounts, to be triggered on events such as a rating downgrade on the servicer, but these had never been prefunded.
In addition, the repayment mechanism includes a target overcollateralisation level to enhance the protection to class A and class B investors.
As with every new product, transparency is key to the success and growth of the asset class, and VW has used a German quality certification from True Sale International to its China securitisation. The Driver programme has used the TSI standard for years, but it is a first in China.
Ford and BMW also employed their offshore practice in their respective deals in China. For example, BMW named its deal Bavarian Sky China similar to its deals in Australia and German under Bavarian Sky programme.
In the US, around 90% of car purchases come with financing, and around 50% of auto loans are from dedicated auto-financing companies. The marker in China, however, is far smaller.
“In China, the penetration rate for auto financing is around 15% only. The penetration rate is expected to grow to 30% in the next five years, which may be faster than the growth of the auto market,” Steinemann said.
While foreign firms bring plenty of experience and best practices, China’s regulators are also making a big push to develop a home-grown securitisation market, as shown in the New Nine Initiatives that the State Council unveiled early this May.
Some financial institutions have received notices that the CBRC has decided to change the ABS process to a registration mechanism from a regulatory approval system. It suggests ABS issuance will become a regular order of business, rather than sporadic pilot projects.
The more-optimistic market participants believe 2014 ABS issuance will pass the Rmb200bn mark. Regardless of those predictions coming true, China’s securitisation market is already enjoying a record year.
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