Setting the template: Structured finance is enjoying something of a renaissance across Asia-Pacific, but China’s first CLO of commercial banking assets stands out for its significance. For setting a template for risk management, Bank of Communications’ Rmb3bn collateralised loan obligation is IFR’s Asia-Pacific Structured Finance Issue of the Year.
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When it comes to market-defining transactions, China’s first securitisation of commercial banking assets since 2008 is going to take some beating. Bank of Communications’ Rmb3bn (US$476m) debut collateralised loan obligation introduced a risk-management solution to the PRC’s biggest lenders. It also helped raise the bar in China’s domestic capital markets, bringing a number of standard structured finance techniques to the market for the first time.
PRC authorities launched a new Rmb50bn batch of securitisation pilot projects in mid-2012. After policy lender China Development Bank was given first go, BoCom structured a transaction that functions as a “true sale”, with bankruptcy-remote features approaching a global standard.
The deal met China’s own rules that the originator retain an equity tranche equal to at least 5% of the deal – in line with prevailing international standards – and also came with the additional buffer of an unrated subordinated portion of around Rmb263.55m, or 8.69% of the total.
“The 5% retention requirement is very important because the rule aligns the interests of the originating bank and the investors,” said Kyson Ho, head of structured finance, Asia-Pacific, at HSBC, which acted as the deal’s financial adviser.
The ability to remove risk weighted assets from the balance sheet will be an appealing prospect for China’s banks, and will help free up lines for new loans as the country enforces Basel standards.
The deal is backed by 60 performing corporate loans from 34 borrowers, and the senior pieces comprised three tranches at pricing in the range of 4.2%–6.0%. Given that the weighted average interest rate was 6.30% from the underlying assets, the deal obviously made commercial sense.
Taking advantage of the renewed interest of investors in securitisations and following an extensive roadshow across major financial centres in China, the transaction attracted widespread interest from banks, funds and – for the first time – insurance companies. Although the first of its kind, the deal was popular enough to achieve very tight pricing.
The transaction met BoCom’s objectives of developing an “asset-side” tool to enable the lender to manage its asset growth from an accounting and regulatory capital perspective, establishing a sustainable platform to facilitate future issues and creating a base across a broad range of investors.
The deal comprises Triple A rated A1 notes of Rmb850m, priced at 4.2%, Triple A rated floating-rate A2 notes of Rmb1.6bn, priced at 4.4% for the first interest rate period, and Single A rated floating-rate B notes of Rmb310m priced at 6.0% for the first interest rate period. Average lives are 0.48, 0.82 and 1.5 years, respectively.
Among the tranches, the soft-bullet A1 tranche was the most popular as it appealed to a wide range of investors. The A2 and the B tranches are pass-through certificates, attractive mainly to banks. The mezzanine tranche, and even the subordinated tranche, saw more interest than in the past as domestic institutional investors have become more sophisticated.
Originator and servicer BoCom chose Haitong Securities, Guotai Junan Securities and Citic Securities as joint lead managers. Zhonghai Trust acted as a trustee, while Zhong Lun was the legal adviser.
BoCom’s deal proved that a domestic securitisation can be economical and a useful tool for China’s banking sector. Already eight to 10 more securitisations are expected to hit the market before the end of the first half of 2013. Policy banks, commercial banks, city and rural commercial banks and auto-loan financiers are all working on such transactions.
That has prompted speculation that the Rmb50bn quota will soon be increased and hopes that securitisation will become a regular risk-management tool and fundraising channel instead of a one-off show under government direction.
