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Treasury & Capital Markets
Lacklustre year for China securitization market
Onshore liquidity sinks Korean cross-border ABS deals
Chito Santiago 14 Sep 2023

“We’re facing more headwinds than what we’ve expected. Our key markets China and South Korea are witnessing a slowdown in issuance volume,” Andy Lai, head of asset finance and securitization for Asia-Pacific at BNP Paribas, tells The Asset as he explains the current state of the securitization market in the region. “In China, the auto loan asset-backed securities (ABS) deals have been declining continuously since 2021 and the residential mortgage-backed securities (RMBS) transactions are stagnant.”

Indeed, it has been a lacklustre year so far for the securitization market in China with the issuance volume in the first half of 2023 down by 12% year-on-year to 852.7 billion yuan (US$117.13 billion), according to S&P Global Ratings. It attributed the sluggish performance to shaky consumer confidence and continued weakness in the property sector.

The rating agency says the softened property market continued to weigh on the issuance of mortgage-backed securities. RMBS issuance stalled, while the commercial mortgage-backed securities (CMBS) recorded a double-digit drop in issuance volume. “RMBS issuance momentum will depend on the pace of a recovery in China’s property market, Chinese banks’ mortgage origination volumes and the regulatory stance on mortgage growth and RMBS issuance,” it adds.

Lai says the lockdown imposed last year by the Chinese authorities to contain the resurgence of Covid-19 impacted auto sales. “At that point, no one was applying for auto loans and there were no new auto loan originations until the end of last year,” he notes. “As a result, the auto finance companies have reduced financing requirements.”

According to S&P Global Ratings, auto ABS issuance volume in the first half of 2023 fell by 30% year-on-year to 88.5 billion yuan. Captive auto finance companies issued 17 transactions during the period, down from 26 transactions a year earlier.

Amid the downtrend, there’s still an appetite for green auto ABS in 2023 with five transactions valued at 20.6 billion yuan settled in the first half of the year. Issuer interest in this sector is likely due to rising electric vehicle (EV) loans on the back of more EV deliveries over the next year or two. Two originators issued their debut green auto ABS in the first half, bringing the number of green issuers to eight. S&P Global Ratings anticipates more first-time originators will come to the market because the number of participants at present is relatively limited. In 2022, five originators issued green auto ABS among the roughly 20 repeated sponsors.

Meanwhile, some asset classes are manifesting positive momentum in the midst of the challenging market environment. One of them is the leasing receivables ABS, which accounted for about 17% of the issuance volume and registered a 3.1% growth to 145 billion yuan in the first half of 2023. Equipment leasing companies are among the most frequent issuers, partly driven by a growing market for financial lease ABS and as an incentive for these issuers to diversify their funding sources.

Robust growth

Some specific sectors under the credit ABS scheme also posted robust growth, including consumer loan ABS, and micro and small enterprise (MSME) loan ABS.

Consumer loan ABS issuance in the first half of 2023 grew by 150.4% year-on-year as it maintained the healthy demand from the second half of last year and was underpinned by repeated issuances and debut transactions. S&P Global Ratings forecast the deal flow will continue in 2023 considering the policy support in consumption and consumption-related financing activities, regular issuance from repeat issuers, and investors seeking opportunities in the absence of RMBS offerings.

In July this year, S&P Global Ratings assigned a AAA (sf) rating to the first consumer loan ABS transaction from China. Mashang Consumer Finance Company was the originator, seller and servicer with Chongqing International Trust Company acting as the issuer and as trustee of Anyihua 2023 Phase III personal consumption loan ABS. The Class A notes of the deal amounting to 1.49 billion yuan were rated AAA (sf), while the Class B notes amounting to 210 million yuan were not rated. The subordinated tranche amounting to 300 million yuan was also not rated.

Incorporated in Chongqing, Mashang is one of the largest consumer finance companies licensed in China in terms of asset size. As at December 31 2022, it reported total assets of around 66.51 billion yuan and cumulative loan origination of over 1.12 billion yuan. It offers consumer loans that are consumption-related and disbursed directly to the borrowers for the purchase of goods or services.

“Consumer loan ABS is an asset class that both local and international investors would like to have,” explains Lai. “And this comes as consumer loan ABS deals are starting to get international rating as demonstrated by the Mashang deal.”

In accessing the ABS market, consumer loan companies are interested in what the auto finance companies exactly do. “They want to tap the ABS market to diversify their funding source in order to support their growth and development,” says Lai. However, consumer loan companies face constraints in tapping the ABS market in terms of the scale of their business, which is smaller than the auto finance companies, some of which are able to price deals of up to 10 billion yuan.

“I do not see consumer loan companies doing that type of issue size since their businesses are usually smaller than the auto finance companies,” Lai points out. “At the same time, arranging ABS deals also involved additional cost, compared with their conventional funding source.”

The good news is that consumer loan companies generally have a higher profit margin than auto finance companies, which will enable them to pay the cost of doing ABS deals even though from the all-in cost perspective, they are less attractive.

Issuance in MSME loan ABS under the credit ABS scheme also rose by over 90% in the first half of 2023. Total issuance, according to S&P Global Ratings, amounted to 20.6 billion yuan, which accounted for around 13% of the total securitization issuance under the credit ABS scheme in the first half.

Onshore boost

In other markets, the Korean cross-border ABS market has been impacted by the recovery in domestic liquidity at the beginning of 2023 following the problems in the local debt market towards the end of 2022 due to issues related to Legoland’s bond default. A missed bond payment by the developer of the Legoland theme park in September 2022 set off market turmoil. Policymakers had to step in and introduce a series of measures to shore up the drying liquidity in the Korean credit market.

“With improved onshore liquidity, the regulators were urging ABS issuers and borrowers to access the domestic market to the extent they can by restricting foreign currency issuance quotas,” says Lai. “As a result, the credit card and auto loan companies were issuing senior unsecured notes in the onshore market, which offers them better pricing than what they can secure in the cross-border ABS market. There were even cases when the issuers and borrowers cancelled their cross-border mandates since the onshore market is so liquid and getting an approval for a cross-border deal is difficult.”

But there are signs the cross-border deals may start to pick up as companies have resumed sending requests for proposal (RFPs) in the second half of the year.

The covered bond market is doing well, Lai says, adding that there is a good chance the issuance volume for 2023 in Asia-Pacific, including Japan and Australasia, will be bigger than last year, which was up 80% from 2021.

Outside of Japan and Australasia, though, the covered bond market is lagging behind with the 2023 volume as at September 11 amounting to just almost US$3.30 billion, compared with US$4.84 billion in the same period a year ago, according to Refinitiv.

The government-owned Korea Housing Finance Corporation, which facilitates a long-term and stable supply of housing finance, has emerged as one of the most frequent issuers of covered bonds in Asia, printing deals in social format and across different currencies – US dollar, euro, Swiss franc and Australian dollar. Total proceeds year-to-date to September 11 amounted to US$1.05 billion. DBS tapped the market twice raising US$1.59 billion, while South Korean lender KEB Hana printed a deal in April with proceeds amounting to US$661.95 million.

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