Securitization to help dispose of NPLs
By Chen Yao (China Business Weekly)
Updated: 2004-04-13 10:23

China's asset-management companies are considering securitization as the final solution for disposing of bad loans, despite existing legal hurdles and the country's lack of expertise in the area.

Yang Kaisheng, president of the China Huarong Asset Management Corp (CHAMC), said last week, "We are seeing securitization as a critical tool, probably the ultimate one, to dispose of non-performing loans (NPLs).

"Securitization will make bad loans liquid, and will considerably enhance asset value and boost investors' confidence."

Yang made the comments during the China Securitization Forum 2004.

CHAMC is one of the four asset-management companies established in the late-1990s to dispose of NPLs held by China's four largest State-owned lenders.

Three years ago, CHAMC -- in a pioneer initiative -- began using securitization to repackage NPLs.

Last year, the company launched a so-called "quasi-securitization" programme worth 13.2 billion yuan (US$1.60 billion) with CITIC Trust and Investment Ltd.

Asset securitization originated in Western countries in the 1970s.

Under such an arrangement, an originator sells a portfolio of assets, normally with stable future cash flows, to a special-purpose vehicle (SPV).

The SPV then issues loan notes to finance the securitization.

Although securitization has long been used as a financing tool by Western financial institutions, it has progressed slowly in China, due to legal restrictions and regulators' concerns about risks.

China's Company Law all but rules out the establishment of a SPV, or a pure holding company, that contracts out all of its asset-management functions to a service provider.

Moreover, the issuance of a corporate bond is subject to strict requirements. The Company Law requires that net assets of the issuer must exceed 30 million yuan (US$3.63 million), while the total bond issuance must be limited to 40 per cent of the issuer's net assets.

"Establishment of a SPV company is crucial during the securitization process. But such a company has a hard time finding its identity in China's Company Law," said Liu Borong, partner of Beijing-based Global Law Office.

"The Company Law sets a minimum capital requirement that SPVs cannot meet. It is much easier to use an offshore SPV," he said.

China Cinda Asset Management Corp last year co-operated with Deutsche Bank to repackage 20 of its assets into a programme worth 1.6 billion yuan (US$193.35 million) and issued bonds designated to foreign investors.

The effectiveness of China's Trust Law in 2001 provided a line of hope for asset-management companies trying to initiate asset securitization onshore, Liu said.

"The Trust Law could easily satisfy the risk-separation requirement for asset securitization," he said.

The securitization process requires both the issuer and the SPV that it creates be unlikely to declare bankruptcy to protect investors.

"Establishing a law specifically for asset securitization is beyond our responsibility," said Zhu Shaoping, a senior official with the National People's Congress (NPC) Financial and Economic Committee.

China's banking authorities will issue regulations on securitization, based on the Trust Law, and pilot programmes are encouraged before a legal framework is finally established, Zhu said.

"Whatever form asset securitization will take, the key will lie in the calculation of the future cash flow of underlying assets," said Qian Jun, managing director and head of the securitization division of Banc of America's Global Structured Finance Group.

In the US securitization market, where a legal framework has long been entrenched, banks compete to create models and techniques to calculate assets cash flows, Qian said.

"That is the basis for determining the price of asset-backed securities," he said. "Unfortunately, Chinese banks lack the expertise in asset securitization."

The US securitization market reached, by the end of last year, US$22 trillion. The market for mortgage-backed securities reached US$5.3 trillion.

China's securitization market, although catching up slowly, will eventually become a goldmine for banks, said Zhao Haihua, head of the Kinghing Trust and Investment Corp.

Chinese banks, with the 8-per-cent capital requirement set by banking authorities, will try all means to boost their capital bases and trim their balance sheets, experts said.

China Construction Bank and the Bank of China, two of the country's largest State-owned lenders, have announced plans to list overseas within two years.

The Chinese Government, in support of the banks' listing plans, injected US$45 billion in fresh capital into the banks to raise their levels of capital.

"That is still far from enough," said Ba Shusong, a senior researcher with the State Council's Development and Research Centre.

The State-owned banks, which have been weighed down by accumulating NPLs, will have to eventually rely on themselves in solving their capital constraints, he said.

"One important strategy for the banks is the removal of assets from their balance sheets. That would mean less capital is needed," he said.

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