Amid China’s economic recovery, the country’s securitization market has shown remarkable resilience. According to the financial data and information company Wind, the total issuance of asset-backed securities in China reached Rmb2.9 trillion ($433 billion) in 2020, a 22% increase on the year before.
Compared to conventional debt, securitization provides corporates with a valuable funding channel without increasing their debt levels. In recent years, an increasing variety of asset classes has been introduced to the market, thanks to the favourable regulatory environment. The regulators have also simplified the procedure for product registration, increasing accessibility to the market.
For investors, pools of income-generating assets offer more transparency and predictability than covered bonds. “Securitized products present investors with a unique angle to uncover the true value of their investments,” says Li Zhiming, executive head of ABS and chief of internationalization, fixed income team, investment banking department, CICC.
In 2020, the Beijing-headquartered investment bank was lead manager on Rmb238 billion of ABS deals, a 30% year-on-year increase and a performance that positioned CICC as the second leading underwriter of ABS, according to Wind.
RMBS to help propel ABS
For Li Zhiming, the strong growth of China’s ABS market is likely to continue this year as more financial institutions and companies seek to diversify their funding base by issuing securitized debt.
In particular, the issuance of residential mortgage-backed securities (RMBS), which declined in 2020 compared to the year before, is likely to rebound this year as the impact of the pandemic continues to ease. In addition, on December 31, China’s central bank and the banking regulator issued a new rule* to restrict development and mortgage lending by imposing caps on commercial lenders. This will potentially increase demand for RMBS origination.
“RMBS is a reliable tool for financial institutions to optimize the efficiency of their balance sheets,” says Li Zhiming. In 2020, against a market contraction, CICC underwrote approximately Rmb59.7 billion of RMBS, up about 8% from the previous year, according to Wind. Among those transactions was the Jianyuan RMBS 2020-2 deal originated by China Construction Bank. CICC successfully helped the bank establish an Rmb224 million senior B tranche especially for offshore investors.
“CICC has been playing a powerful role in connecting global markets with China since it was founded 25 years ago. We have well-positioned resources and networks worldwide,” says Li Zhiming. “It’s the foundation to serve our clients’ key interests and tackle any challenges conscientiously.”
Asset quality is key
While securitization offers a degree of separation between the originators’ credit risk and the cash-flow of the asset, Li Zhiming says that some corporate ABS are not immune to the credit risk of the originators. For example, if the future income of an asset is dependent on normal operation by the originator, a credit crunch may cripple the asset’s ability to bring in cash as anticipated.
Furthermore, it is still common practice for some corporates to rely on so-called shortfall guarantees to enhance the credibility of ABS deals. Abusing such guarantees while overlooking the underlying asset quality may increase risks in the market, according to Li Zhiming. “Market participants are highly recommended to focus on the fundamentals of the asset,” he adds.
In terms of assets he views as promising, Li Zhiming says that Internet Data Centers (IDC) is one sector to look at in China, as the country’s data economy continues to boom. According to CICC’s research, the size of China’s IDC market is expected to triple in size to more than Rmb590 billion by 2025.
The asset-heavy industry frequently uses the securitization markets in developed countries such as the US, where real estate investment trusts (Reits) make up a substantial portion of its capital market. In China, the growth and development of the Reits market may also create tremendous opportunities for IDC operators and investors.
“It’s a valuable and vibrant sector in China, and it needs securitization facilities and arrangements to achieve long-term sustainable growth. CICC has a dedicated team to help clients navigate and capture the opportunities,” says Li Zhiming.
One such example of this is the groundbreaking Rmb1.1 billion SinoOcean-CICC-Uniqloud No.1 IDC ABS transaction that CICC helped initiate in July last year. For future issuance by the originator, CICC secured a total registration quota of Rmb3.2 billion.
“One of CICC’s core values is innovation. We embrace exceptional ideas and bring cutting-edge solutions to the table,” says Li Zhiming.
*On centralized management system of real estate-related loans by banking financial institutions.