Best Firm for Securitization
Banks and securities houses have raced to grab market share and come up with new products with higher levels of structural complexity. In a conversation with Asiamoney, one head of structured finance at a securities firm warned that the Chinese asset-backed securities market may have already become too crowded.
However, one securities house has managed to wrap up the year with both a leading market share and a long list of innovative deals that will have a real and lasting impact on the future of China’s ABS market.
Citic Securities (CiticS), a Beijing-based firm incorporated in 1995, put an end to China Merchants Securities’ three-year dominance at the top of the ABS underwriting league table, surpassing the defending champion by a narrow margin of Rmb956 million ($136 million), according to domestic market data provider Wind.
During the awards period, CiticS underwrote 196 deals in the interbank and exchange markets, with a total value of Rmb231.4 billion ($32.8 billion), boasting a 10.8% market share, according to Wind.
It also topped both the auto ABS and Account-receivables securitization underwriting league tables and maintained a top three position in other asset classes including financial lease ABS, commercial mortgage-backed securities and residential mortgage-backed securities.
Apart from a dominant market share, CiticS has been a pioneer of innovation in mainland China. During the awards period, CiticS underwrote multiple landmark deals such as the first shelf CMBS for the logistics industry for GLP, the first ‘New Economy’ supply chain ABS for Xiaomi and the first ABS deal to provide credit default swaps for a mezzanine tranche for JD.com.
The firm had a role in the growth of the country’s quasi-Reit (real estate investment trust) industry. CiticS structured and underwrote Cainiao Zhonglian CiticS China Smart Logistic Network Storage ABS in March. The underlying assets are logistics warehouses of Cainiao, a subsidiary of the e-commerce firm Alibaba.
The deal was the first in the onshore market to allow consecutive injections of assets and funds into the same product. Previously, China’s so-called quasi-Reits were essentially privately issued closed-end funds with no secondary liquidity.
The securitization business was of strategic importance to CiticS from the beginning. It established a company-level securitization department in January 2006.
CiticS’s early efforts have surely paid off. With 70 professionals in its securitization team now, it is able to serve a large group of some 200 originators and covers 19 out of 23 asset classes for ABS, the widest range among all market players. It has also been frequently called upon by regulators to provide feedback on new policies.
CiticS has arranged and sold some of the most innovative deals in China’s securitization market this year. But more importantly, in a fast-growing market flooded by ‘firsts’ with no follow-ups, CiticS has designed deals that can serve as real references for others and solved some long-lasting challenges in the Chinese ABS market.
Best for Auto Asset-Backed Securities
Bank of China
Auto ABS was one of the earliest sectors to develop in the Chinese securitization market. With time, market participants have
|Donghai Liu, Bank of China|
As a result, Asiamoney frequently hears from onshore bankers that the industry –although still expanding rapidly in size – is filled with ‘routine’ issuances. Further, banks and securities houses lack the motivation to innovate.
But not in the case of Bank of China. An unlikely champion in the securitization industry, Bank of China’s ABS team – led by Donghai Liu, general manager of investment banking and asset management – has shone brighter than leading securities houses in the auto ABS sector this year.
This ‘big-four’ bank is not the largest underwriter of auto ABS, ranking third in volume during the awards period, behind Citic Securities and China Merchants Securities, Wind data shows, but it acted as the lead underwriter on 16 auto ABS transactions with a total value of Rmb91.2 billion ($13 billion). Among those, it underwrote Rmb22.4 billion, Wind data shows.
However, Bank of China stood out from its peers because of its ability to act on trends that will shape the market in the future and bring in international investors.
Automakers have started to use auto lease asset-backed notes (ABN) as an alternative funding channel to the more traditional auto ABS. Auto lease ABN allows non-financial enterprises to issue securitization products in the interbank market. Previously, they could only do so in the exchange market, where liquidity is much tighter.
The change came about because auto ABNs are subjected to more lenient regulations than auto ABS – at least for now. Bank of China is a pioneer of that trend.
The bank acted as the sole lead underwriter and bookrunner on BMW’s debut Bavarian Sky China Leasing ABN in April. The deal is also China’s first auto lease ABN rated by an international rating agency.
The deal is backed by the auto leases of BMW’s majority-owned subsidiary, Herald International Financial Leasing. Despite the short operating history of Herald and the deal’s lower rating than BMW’s auto ABS, Bank of China managed to price the senior class-A tranche of the note at 3.3%, only 2 basis points higher than the senior class-A tranche of BMW’s ABS, which had been sold only a month earlier.
Bank of China’s commercial weight has made it a favourite among foreign originators, who have been steadily increasing their deal size each year in mainland China.
Its close connections with the regulators, its expertise in ABN and its large international client pool all make it a strong player in the auto ABS market. But equally importantly, the bank has made the securitization business a priority. And when Bank of China sets its mind on something, all competitors, no matter how established, should watch out.
Best for Residential Mortgage-Backed Securities
China Merchants Securities
|David Cao, China Merchants Securities|
CMS has ranked first in RMBS underwriting volume for five years in a row. During the awards period, the team, led by David Cao, head of financial institutions and co-head of ABS business, underwrote Rmb111 billion ($16 billion) of RMBS transactions, a 20.5% market share, Wind data shows. Its closest rival has 13.5% of the market.
CMS is also the go-to securities house for almost every large RMBS originator. During the awards period, it participated in every deal originated by Agricultural Bank of China, China Merchants Bank and the Industrial Bank. It has also taken part in 73.3% of the deals originated by China Construction Bank, the largest player in the market.
However, CMS has not rested on its laurels. Instead, the firm is making the market better, one deal at a time. CMS has completed a series of landmarks that are textbook definitions of an RMBS deal done well. One example is Jianyuan 2019-7, a Rmb9.87 billion four-tranche trade sold on the day after the USD/CNH exchange rate broke the seven handle for the first time in a decade.
The deal, whose three senior tranches are rated triple-A by S&P Global Ratings, sailed through the trade tension and saw a record high of international participation: 14 global investors gobbled up Rmb2.61 billion. Among those 14, eight were investing in the Jianyuan series for the first time.
The execution of the deal also illustrates the dedication of CMS to solving a long-lasting problem in the Chinese RMBS market, notably the lack of secondary market liquidity.
CMS and other underwriters provided continuous two-way market-making service for class A1 and A2 notes of Jianyuan 2019-7 on every trading day. Further, they managed to qualify the triple-A rated senior tranches for pledged repo collateral, making the notes more attractive to onshore investors. That was especially welcome, since smaller brokers were finding it increasingly hard to get their collateral accepted by larger banks.
CMS has a dominant market share and a clear determination to improve the RMBS market; contenders have a long way to go before they can pose a threat to its position.
Best for Commercial Mortgage-Backed Securities
CSC was one of the first securities houses in mainland China to tap into the commercial mortgage-backed securities industry. Since
|Xie Changgang, CSC|
Unlike some securities houses that have dived into a wide range of property types, CSC has a proven history of securing a narrower range of extremely high-quality commercial assets. The securities house has a close relationship with many big commercial real estate providers, such as Wanda Group, Sino-Ocean Group, Golden Resources and Greenland Holdings.
With these assets, CSC makes sure that its CMBS are tightly priced, well-structured and cleanly executed.
CSC also has strong sales capability in CMBS. In April, the firm acted as the arranger for the CSC-Yingxiang CMBS, securitizing the future rental income, commercial management fees and parking lot fees of China Central Place, a high-class office building complex. The senior class-A of the trade was the most tightly priced CMBS senior tranche since 2017.
In August, CSC broke its own record. The firm acted as the lead underwriter of the Rmb9.3 billion CICC-Jinmao Kaichen CMBS, underwriting more than half of the deal. The senior class-A was priced at 4.1%. It is still the lowest-priced CMBS tranche since 2017.
In a market where the amount of deals still trails far behind the amount of high-quality commercial assets that can be securitized, the ability to secure such assets is equally important, if not more so, than discovering new property types.
With each deal, CSC strengthens its leading position in the market.
Best for Account-receivables Securitization
Account-receivables asset-back securitization is unique to China. The underlying assets of account-receivables ABS can be roughly divided into two categories: enterprises’ account-receivables obligatory rights and factoring agents’ obligatory rights. Based on these two types of underlying assets, account-receivables ABS can be divided into general and reverse factoring or, as bankers call it, supply-chain ABS.
The market saw rapid growth in issuance volume with the birth of the first supply-chain ABS – Ping An-Vanke Supply Chain Finance Asset-Backed Plan – in 2016.
Citic Securities, the best firm for account-receivables ABS, ranked number one in the value of deals for which it acted as the administrator during our awards period, arranging Rmb67.75 billion ($9.6 billion).
Compared with others, CiticS’s model is more balanced in the account-receivables ABS market, with a strong presence in both general and supply chain ABS.
In December 2018, CiticS acted as the administrator and underwriter for PowerChina’s receivables asset-backed plan. The underlying asset was 40 receivables with an outstanding balance of Rmb2.3 billion from 36 owners across eight industries.
The deal helped the state-owned enterprise expand financing channels and make its low-liquidity assets more liquid.
CiticS has also had a solid performance in arranging and underwriting supply-chain ABS, working with core enterprises such as Evergrande Real Estate Group, China Jinmao Holdings and China Construction Second Engineering Bureau.
Supply-chain ABS, although growing in popularity thanks to the recent clampdown from regulators on real estate companies, only accounts for 55.5% of the total new issuance volume in account-receivables ABS business so far this year, according to Wind data.
As an administrator, CiticS was able to cover the whole product chain from structural design to duration management of underlying assets, which is crucial in helping an underwriter stand out from the crowd.
Best for Asset-backed Medium-Term Notes
Bank of China
The asset-backed notes (ABN) market allows non-financial enterprises to issue securitization deals in the interbank market. Bank of China, more than any other firm, has led market developments.
The bank wrote Rmb30.6 billion ($4.3 billion) of ABNs during the awards period, giving it a 12.4% share of the market, Wind data shows: Everbright Securities ranks second with 8.85%.
Bank of China is not only the largest underwriter in the ABN market, it has also covered a wide range of underlying asset classes, including factoring receivables, e-commerce consumer loans and lease receivables. The bank has acted as the lead underwriter on landmark deals such as the first green tariff receivable rights ABN, the first foreign auto lease ABN and the first ABN to have its floating-rate tranches linked to China’s new benchmark rate, the loan prime rate.
With such a rich experience in the credit ABS market, Bank of China has successfully brought ABS investors into the ABN market. The bank acted as the lead underwriter for BMW’s debut ABN – Bavarian Sky Leasing 2019-1. The deal was originated by BMW’s subsidiary, Herald International Financial Leasing.
Although BMW has been a frequent issuer in the auto ABS market, its debut ABN deal faced challenges. Herald has a short history of running BMW car leases. Further, S&P Global Ratings has rated the senior tranches of the ABN several notches lower than the senior tranches of the automaker’s most recent auto ABS deal.
However, Bank of China managed to price the senior class-A notes of the auto lease ABN only 2 basis points higher than the corresponding tranche of BMW’s ABS deal, which had been sold just a month earlier. Five months later, BMW’s second ABN deal, also underwritten by Bank of China, achieved even tighter pricing than the first one.
Since the ABN market is relatively undeveloped compared with the exchange and interbank ABS markets, the National Association of Financial Market Institutional Investors, the regulator of the ABN market, still gives out approvals to deals on a case-by-case basis. While ABS products need a few weeks from being structured to being sold to the market, ABN products need months to go through the same process.
Bank of China, as one of the big-four commercial banks in China and the largest underwriter of the ABN market, has extensive experience in communicating with regulatory authorities, a useful advantage.
Most Innovative Bank
China International Capital Corp
Although the Chinese ABS market is still relatively young compared with those in more developed markets, domestic banks and securities houses have innovated relentlessly. From structuring supply-chain asset-backed securitization to securitizing a parking-lot’s future income, the market has an insatiable appetite for new asset types.
With such fierce competition, simply making use of a new asset class is admirable but not enough to call a firm the most innovative. CICC, however, has ventured out into new asset types as well as making substantial improvements with the existing ones.
As an example of its ability to discover new asset types, the firm acted as the joint lead on the first shelf ABN backed by leases taken out by small and micro-enterprises from Ping An International Financial Leasing, which has a long history of working with such firms.
In recent years, Chinese small and micro-enterprises have found it increasingly hard to seek funding for themselves. While the large state-owned commercial banks have received funding from the government to lend to small and micro-enterprises, they lack a pool of good-quality small and micro-enterprise clients from which to choose. Therefore, the deal matched the need from cash-thirsty small enterprises with large banks’ funding.
But CICC’s innovation effort does not stop at jumping on new asset types. In May, CICC acted as the joint lead underwriter of Bank of Hangzhou’s debut RMBS, an asset class dominated by large bank originators such as the China Construction Bank and Bank of China.
The Rmb3.16 billion ($450 million) debut under the series name Hangying was only the beginning. The second issuance in the series, Hangying 2019-2, surpassed the first one in size, becoming the largest RMBS issued by a city-level commercial bank.
More impressively, CICC managed to introduce international investors to Bank of Hangzhou’s RMBS thanks to its vast investor coverage, both at home and overseas. For a deal without an international rating and a market with relatively poor secondary liquidity, it was quite an achievement. Both deals have real impact on the Chinese securitization market and both have helped unlikely originators to issue ABS deals, opening another funding channel for them.
Best Rating Agency for ABS/MBS
China Chengxin International Credit Rating
China Chengxin International Credit Rating (CCXI) is the largest credit rating agency in China and the fourth largest in the world. A
|Yan Yan, CCXI|
CCXI, led by Yan Yan, has rated landmark deals including the first RMBS in 2005 by China Construction Bank, the first non-performing loan ABS in 2006 and the first ABS with over-collateralization in 2014.
As the Chinese ABS market picked up pace in recent years, CCXI also rated more complicated deals, including the first credit loan ABS deal originated by a foreign bank (Huiyuan 2015 CLO), the first consumer finance ABN product (Jingdong Baitiao 2017), and the first CLO linked to the new benchmark interest rates (Xingyin 2019-4).
CCXI has cemented its leading position in both the interbank and exchange markets. Since 2012 when the ABS market went through a mini-revival, CCXI has consistently had a controlling market share of more than 50%. Last year, CCXI further expanded its coverage in the credit ABS realm. In the first nine months of this year, the credit rating firm boasted a 57.5% market share in credit ABS.
Although many innovative deals will be quickly forgotten and have no followers, a credit analyst still needs to do the hard work to understand the structure and assets behind each deal. With each ‘first’, CCXI has understood the Chinese ABS market a bit better.
As the market continues its rapid transformation, CCXI is poised to deepen its understanding and prepared to lead the market’s developments.
Best Law Firm for ABS/MBS
|Wu Dong & Yan Yan, Fangda Partners|
In terms of deal volume, Fangda is not the biggest in the market. Zhong Lun Law Firm, King & Wood Mallesons and Dentons rank above it.
During the awards period, Fangda provided legal services to 23 ABS deals with a total value of Rmb45.7 billion ($6.5 billion), according to Wind data.
However, the local firm jumped on a series of challenging and innovative deals such as the first public-private partnership (PPP) ABS. The Rmb706 million deal is backed by China Fortune Land Development’s receivables from providing heating to Gu An Industrial Park.
The firm was also the sole law firm advising on the first-ever microloan ABS in 2013. The Rmb500 million transaction was backed by the loans offered by the microloan platform Ant Financial. The deal was also the first onshore ABS with a revolving structure.
The firm is particularly proud of its work on a more recent transaction. The deal, Chengdu Jiaotou Parking Lot Income Rights ABS, is backed by the rights to future income generated by smart parking spaces on the roads of the city of Chengdu. These parking spaces are car lanes on the public roads used for parking and thus have an unclear ownership structure and rights of use.
However, these parking spaces have a stable source of income.
Fangda successfully communicated with the local regulatory bodies to clear any legal difficulties. The deal opened the way to securitizing future income from other parking lanes in China, a type of public asset with huge potential.
As the Chinese ABS market is set to grow in complexity in the future, it is important for law firms to not only grab market share from existing asset types, but also identify new ones for their clients. Fangda has done that during the awards period.
Best ABS/MBS DealOriginator: Beijing Jingdong Century Trade Co., Ltd
Jingdong-CiticS No. 7 Baitiao Receivables Asset-backed Securities
Lead underwriter: Citic Securities
Choosing the winner for the best ABS/MBS award this year was an especially tough job. Many deals have stood out during the awards period and each has its own importance. Some attracted a record number of foreign investors. Others helped small and medium-sized enterprises to secure cheap funding. Some achieved record low pricing in the microloan ABS market.
However, one deal stood out from the rest in its daring to innovate as well as in its market-wide implications – Jingdong-CiticS No. 7 Baitiao Receivables ABS.
The deal, a Rmb1.5 billion ($213 million) four-tranche transaction sold in March, was the first asset-backed securitization deal in China to provide credit default swaps (CDS) for investors in the mezzanine tranche. The transaction is backed by a pool of small and diversified consumer loans. Based on the large data set from the issuer’s parent company, online shopping firm JD.com, the originator has formed user profiles and guaranteed the high quality of these consumer loans.
JD.com is China’s leading e-commerce platform with over 320 million active customers. Citic Securities has formed a close relationship with the issuer in recent years. In 2019, the firm was the lead underwriter on 13 out of 37 of JD.com’s ABS deals, according to Wind data.
Citic Securities has been the underwriter of many Jingdong Baitiao ABS products and has a deep understanding of the risks and investor group. Based on previous experience, CiticS introduced the CDS for the mezzanine tranche of Jingdong-CiticS No. 7 Baitiao Receivables ABS.
The Rmb60 million mezzanine tranche was priced at 7% and the CDS was priced at 180 basis points. The deal was the first time such a hedging product was used in the securitization market. After that, CiticS provided the CDS tool in two other corporate bond issuance.
CiticS, along with CICC, CSC and state-owned China Bond Insurance Co, are the only four securities houses qualified as CDS dealers.
The deal helped promote both the ABS market and the CDS market, which the regulator has been trying to make popular since September 2016. The creation of CDS for JD.com’s deal also helps expand the scope of potential investors in the mezzanine tranche as more risk-averse investors can now gain high returns with relatively low risk. This deal proves an effective way of mitigating the credit risks of private enterprise and therefore facilitates their bond issuance.