Moody's: Development prospects for China's securitization market robust

Moody's Investors Service says that the outlook for China's securitization market is robust, given the authorities' initiatives to develop the country's capital markets, as exemplified in the recent raft of reforms, the market's expansion and associated regulatory developments.

Moody's sees broad recognition that securitization is playing a key role in deepening the country's credit market and notes that issuance jumped to approximately RMB280 billion in 2014 from RMB16 billion in 2013, with a commensurate spike in sponsors.

In this context, China's securitization market is also growing fast by asset type, originator type, the number of investors and third-party service providers, and structural innovations.

Moody's views on the securitization market will be presented by some of its senior analysts at executive roundtables to be held today in Beijing and on Wednesday 4 March in Shanghai.

"The strong issuance seen in 2014 has attracted both domestic and international investor interest, and we expect this trend to persist as the government continues its market-developing initiatives," says Jian Hu, a Managing Director at Moody's .

Recent regulatory and policy changes will also promote future issuance, with the new regulations including a new registration system for credit asset securitization that means qualified issuers will only be required to register transactions before issuance, as opposed to the previous system where regulators approved transactions on a deal-by-deal basis.

"We expect to see more barriers broken down, with a flurry of new asset classes and originators in 2015, such as equipment lease, real estate loans, and consumer loan securitizations, sponsored by both existing and first-time issuers, such as commercial banks, local branches of international bank, financial leasing companies and asset management companies," says Hu. "So far, market issuance has been dominated by securitizations backed by corporate loans, and this is unlikely to change soon."

"In terms of key recent developments, we note that China's more-established auto loan ABS market developed significantly in 2014, with record levels of issuance," says Jerome Cheng, a Senior Vice President at Moody's.

"Looking ahead, Moody's expects issuance levels will continue to increase to satisfy the growing funding needs of auto loan lenders in China's rapidly growing car and car loan market across the country," adds Cheng. "Issuance by the finance captive of global automakers will be particularly notable as they bring the same auto ABS platforms that have been long used overseas to the largest auto market in the world - China."

"More recently, the most significant characteristic of China's securitization market has been the gradual move away from issuing transactions for the purposes of achieving simple visibility and name recognition to achieving real economic benefits," says Ma Li, a Managing Director at Moody's. "In other words, the market has evolved from seeing regulatory-driven issuance to demand-driven issuance."

With the long-term prospects, in addition to government-initiated reform, Moody's says that China's (Government of China, Aa3 stable) high household savings rate is credit positive for its securitization market, because it provides a buffer against potential defaults for loans backing securitized transactions.

However, Moody's notes that overly fast expansion of novel products for China, as an emerging market, carries risks. Accordingly, the prudent selection of assets, and clear and well-understood structures and related documentation are essential for safeguarding these products against unknown risks.

Other risks could include the absence of standardization and transparency for underlying assets; any potential loosening in underwriting criteria; and a lack of adequate monitoring after origination.

Another concern is the fact that the lack of court precedent in China's relatively young legal system highlights legal risk, while operational risk comes from the limited experience of originators in managing these transactions, and the absence of an established back-up servicer market. For new asset classes, there is also little historical performance data, particularly during times of economic stress.

Looking at the Asian region overall, Cheng discussed the increasing use of standby letter of credit supported transactions and their key features as well as the outlook for the covered bond markets in Singapore and Korea.

In addition, Hu in his speech looked at the RMBS, CMBS, ABS and CLO markets in the US, and the RMBS, ABS and covered bond markets in Europe, discussing issuance volumes, supports or obstacles to growth, and developments in transaction features.