Cinda receives approval for securitization
By Xiao Zhang (China Daily)
Updated: 2004-04-22 08:40

The China Cinda Asset Management Co. has received regulatory approval for a pioneering securitization project. The approval blazes a new trail in the banking sector's formidable task of reducing massive, non-performing loans (NPLs).

The go-ahead comes more than a year after the company signed an agreement with Deutsch Bank to securitize a 2 billion yuan (US$240 million) tranche of its non-performing assets.

It was finally achieved after years of discussions about the new methodology.

Cash recovered will go to Cinda after paying principle and interest to investors, while Deutsch Bank will get management fees, sources said.

To get around legal barriers, the securities will be sold to international investors.

Although the assets in the securitization project are all non-performing, they could generate stable cash flow and can provide "investment value" for foreign investors, said Wang Haijun, director of the asset management company's (AMC) investment banking department.

Parts of the portfolio are assets in such areas as power generation, transportation, machinery manufacturing and hotels.

"They (loan borrowers) may have experienced temporary funding difficulties and failed to repay loans, but some of the assets are good assets and can generate good cash flow," he said.

As a structured finance technique that repackages the cash flow generated from underlying assets into tradable securities, asset securitization could help Chinese banks raise capital adequacy ratios by transforming inliquid assets into securities, experts said.

Most of China's banks fail to meet an 8 per cent minimum requirement of capital adequacy. Furthermore, their rapidly growing loan portfolios, part of which are feared prone to souring, keep bringing down the capital adequacy ratios.

The technique is especially needed by China's four AMCs such as Cinda to quicken their disposals of NPLs transferred from the nation's four State-owned commercial banks, and reduce disposal costs.

By the end of last year, the four AMCs had disposed of near 50 per cent of the combined 1.4 trillion yuan (US$169 billion) of NPLs they took over four years ago.

The pace needs to be faster as they are expected to finish the job by 2006.

But China's legal framework does not allow standard securitization, as the existing Company Law makes the creation of a special purpose vehicle, a central part of such transactions, nearly impossible, experts said.

Legal experts said special legislation on asset securitization is indispensable, but many believe China's Trust Law provides enough room to trial securitization.

China Huarong, another one of the four AMCs, launched a pioneering deal last year by repackaging 256 NPLs, worth a combined 13.2 billion yuan (US$1.6 billion), into a trust programme.

The transaction resembled a securitization programme.

The deal brought Huarong 1 billion yuan (US$120 million) in immediate cash payments, and is continuing to pay interest as agreed.

The deal also provided adequate liquidity for investors, with 80 per cent of the trust certificates having changed hands, sources familiar with the deal said.

Further progress has also been reported by commercial banks. Earlier this month, the Industrial and Commercial Bank of China launched what it said was the nation's first securitization project by a commercial bank, and has started roadshows for it.

The project, involving 2.6 billion yuan (US$313 million) worth of NPLs at the bank's Ningbo branch, was also made possible by setting up a trust, sources said.