As part of the agreement between Morgan Stanley and China Construction Bank (CCB) to jointly handle the resolution of an RMB4.3 billion ($520 million) portfolio of non-performing assets originated by the former, the US investment bank will train CCB on how securitization may be used in the disposal of distressed assets.
In response to a question on whether that might mean the two sides actually doing a deal at some point, an official at Morgan Stanley told FinanceAsia that it is too early to say. "It may be a relevant future step but there is nothing at the table right now," he says. "At the moment it is more a case of general training on how securitization can help with NPL resolution, something that the bank has experience of elsewhere in Asia with deals in Korea and Japan."
Morgan Stanley completed the first ever NPL securitization in Asia in 1999, the Y21 billion ($176.9 million) deal backed by distressed real estate loans in Japan. The technology then spread to Korea, Thailand and Malaysia, with the Korea Asset Management Company in particular being a regular issuer of deals backed by distressed assets.
Now it seems that China wants to get in on the act. Despite the fact that no securitization legislation exists yet on the mainland and that there are serious concerns about the enforceability of bankruptcy and foreclosure laws, things are finally starting to happen.
Aside from the Morgan Stanley-CCB tie-up, in January Deutsche Bank and Cinda AMC signed a cooperation agreement to securitize non-performing loans with a book value of Rmb2.55 billion ($308.1 million). If reports in the Chinese press are to be believed, the two sides are looking to put together a deal targeting international investors, and would look to complete the deal within the next three to five years.
Time will tell whether those deals come to fruition, but for those readers that are particularly pessimistic about the prospects for Chinese securitization, a recent deal completed in June involving Huarong AMC and Citic Trust should provide some grounds for optimism.
Although not a securitization in the truest sense of the word, the transaction had many structural features common in an ABS deal. The deal utilized the Trust and Contract laws rather than the existing Company Law, which has never been particularly conducive to bankruptcy remote special purpose vehicles established for securitization purposes.
Essentially, Huarong packaged together a portfolio of distressed assets worth Rmb13.25 billion into a single trust, with Citic acting as trustee. The trust then created senior registered beneficial interests (the equivalent of bonds) for 10% of the agreed value of the pool and sold them to investors. The three-year deal pays an annual coupon of 4.17%, a significant pick-up on the three-year deposit rate of 2.52%. So long as Huarong manages to recover 10% of the underlying collateral's book value, investors will be redeemed in full, with the AMC entitled to any upside as long as recovery rates exceed expectations.
