15 June 2012
The wait is finally over for Chinese financial institutions and the Chinese securitisation industry. The official guidelines for a restart to securitisation mentioned in our March 2012 alert "Expected re-launch of securitisation of China" have now been issued. The People's Bank of China (the "PBOC"), the China Banking Regulatory Commission (the "CBRC") and the Ministry of Finance (the "MOF") jointly issued the Notice on Matters Regarding Further Expansion of Credit Asset Securitisation Pilot Projects dated 17 May 2012 (the "Notice") whereby a quota of CNY 50 billion has been announced by the Chinese regulators for the "third round" of pilot securitisation in China. This marks the reopening of, and demonstrates the government's regain of faith in, securitisation which stalled in China approximately four years ago. Though the amount is trivial considering the Chinese banking sector's total loan balance of around CNY 61 trillion (as at the end of April 2012), it nonetheless allows securitisation to again be an alternative source of funding, and a method to assist with balance sheet structuring in China. Market players anticipate that the quota will be divided among eight to ten institutions.
The Notice addresses certain issues including the following:
1. Underlying Assets: Eligible underlying financial assets must be of good quality with steady and foreseeable future cashflows, with particular encouragement of securitisation in the following sectors:
- national infrastructure;
- small and medium-sized enterprises;
- auto finance;
- local government;
- energy saving and emission reduction industries;
- strategic emerging industries;
- cultural and creative industries; and
- affordable housing construction.
2. Eligibility and Approval Procedures: Eligibility and approval procedures will continue to be governed by the existing regulations1, however a standardised timetable for approvals has been introduced, with a 5 business day period for CBRC to determine eligibility for the originator and a three month period for CBRC to determine approval of the specific transaction. To this end, the Notice "encourages" financial institutions to be examined and verified as eligible and stipulates the securitisation transaction to be simple and clear (rather than involving complicated and synthetic structures).
3. Risk Retention: The Notice stipulates a "skin-in-the game" requirement whereby originators must retain a portion of the subordinated tranche, amounting to no less than 5% of the entire issuance. As such China appears to be following the U.S. model of originator focused retention requirements (rather than the European investor focused retention requirements). No exception for qualifying assets is included in the Notice.
4. Credit Rating: A securitisation now requires ratings from two credit rating agencies (as opposed to one credit rating agency in the previous rounds). Interestingly, the Notice imposes an obligation on credit rating agencies to endeavour to increase the transparency and public credibility of the applicable credit rating.
5. Investor Requirements: The Notice provides that the investor base for securitisation (traditionally only banks) will be expanded steadily, with initial expansion to include approved non-bank institutional investors, such as approved investment funds, insurance companies and national social security funds . The Notice also restricts a bank from holding more than 40% of the issuance of a securitisation.
The re-launch of securitisation in China is a welcome sign for Chinese financial institutions and the industry. Whilst a quota of CNY 50 billion may be too small to have a significant and immediate impact on the market, the Notice is a welcome development and it will be interesting to see if the regulators expand the quota in due course. The Notice shows that securitisation is viewed positively by the regulators and that China is aware of, and in broad agreement with, the international regulatory developments for securitisation in relation to issues such as transparency and alignment of interest.
No announcement has been made in relation to securitisation of corporate assets or in relation to covered bonds.
For inquiries related to this Legal Update, please contact Ben Sandstad, Alastair MacAulay, or your usual contacts with our firm.