Trading Starts of Asset-Backed Securities in U.S. Dollars

China launched its first asset-backed fixed-income product in a foreign currency at the Shanghai Stock Exchange, as the country seeks to increase investment offerings in the domestic market.

The U.S. dollar-denominated asset-backed securities (ABS) used aircraft leasing assets of China Aircraft Leasing Group Holdings Ltd (CALC) as the underlying asset. The $171.33 million product is being managed by Huatai Securities Asset Management Co.

The product, issued on Tuesday, offers an important investment and risk-hedging option for domestic investors and will reduce outflows of the U.S. dollar from the country, industry analysts said.

It is also the first ABS in China to be backed by aircraft assets.

Zhu Qian, deputy general manager of Huatai Securities, said it took nearly two years to study the pricing and settlement mechanism for the ABS, and involved several regulatory departments.

According to the filing of Huatai Securities, the ABS product is structured in eight tranches that will be due between November 2018 and August 2025. All tranches are rated AAA by China Chengxin International Credit Rating Co., a domestic rating agency.

Caixin learned that the offering has been fully subscribed and insurance companies are major investors.

Chinese investors holding foreign currencies are thirsty for investment options, especially amid a regulatory crackdown on highly leveraged, structured products.

Since customers of aircraft-leasing companies are mainly major domestic airlines with good credit and asset records, the ABS product is seen as offering investors sound returns with lower risk, analysts said.

A source close to the China Securities Regulatory Commission said many domestic investors with U.S. dollars have limited investment options in the domestic market and have turned to overseas markets for better returns. That has triggered concern among regulators about outflow of the currency.

“With the launch of the dollar-backed ABS, investors will have a better choice in the domestic market and foreign exchange outflows will be reduced,” the source said.

The new securities product will offer an alternative financing channel for the booming aircraft-leasing sector, industry sources said. The dollar-backed debt instrument will also help leasing companies to reduce foreign exchange risks as they mainly purchase aircrafts overseas with dollars, sources said.

Chinese authorities have encouraged the development of the ABS market over the past few years as a way to rein in the rampant growth of “shadow banking,” which are financing activities outside the formal banking system.

In 2017, the volume of new ABS issuances surged 64.7% to about 1.5 trillion yuan ($236 billion), making China the world's second-largest securitization market in terms of new issuance volume, according to the official Xinhua News Agency, citing a report by credit rating firm Pengyuan International.

But a regulatory crackdown on risky lending activities — accompanied by stricter regulations on securities backed by consumer loan assets — is expected to slow the growth down this year the report said.

Contact reporter Han Wei (weihan@caixin.com)