Jul 27, 2012 03:47 PM

Gov't Financing Platforms to Get New Debt Tool

(Beijing) – China's inter-bank market will soon introduce a new debt-financing tool for non-financial institutions that analysts say will open a door for local government financing platforms to raise money by securitizing their assets.

This new financing instrument, called Asset-Backed Medium-term Notes (ABN), would use anticipated cash flows generated by underlying assets to repay debt, said an official from the interbank market's self-disciplinary organization, the National Association of Financial Market Institutional Investors (NAFMII).

ABNs would provide companies with an alternative financing channel, but were unlikely to have a significant impact on the market because their size won't be large, said Shi Lei, deputy manager of Ping An Securities' Fixed Income Department.

They would allow issuers to bypass restrictions that cap borrowed money at 40 percent of their net assets, as long as the bonds are issued through private placement, the NAFMII source said.

The NAFMII is going to announce ABN regulations soon, but a date has not been set yet, Caixin learned.

Three ABNs may soon be launched, the notes' underwriter, Citic Securities Co. Ltd., said.

The issuers include two local government financing platform companies in Nanjing and Ningbo, and one Tianjin real estate developer, which plans to use the borrowed money to build the city's affordable housing.

Platform companies are going to be among the top issuers in the market because their assets were very suitable for wrapping into ABNs, Shi said.

This is in line with the proposal of many economists, who advocate asset securitization as the best way to enhance the transparency of platform companies' operations, reduce their reliance on bank loans and help solve local government debt problem.

However, despite regulators' support, ABNs were unlikely to replace bank loans and regular bond issuance as the primary financing channel for platform companies in the near future because its secondary market has not been developed yet, a recent research report by Haitong Securities said.

ABNs are essentially a type of Asset-Backed Securities (ABS), the NAFMII source said. They differ in that the former's underlying assets are non-financial assets held by non-financial institutions, whereas the latter usually refers to securitized credit assets owned by financial institutions, he said.

ABS have been commonly used in mature markets but are relatively underdeveloped in China. As of July, only 24 ABS were issued, raising a combined 74.8 billion yuan, among which 17.7 billion yuan has not been repaid yet. Most of them were issued by policy or commercial banks and asset management firms, with the underlying assets ranging from residential mortgages to non-performing loans.

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