Securitisation came to Asia 12 years ago, commencing in Japan. Since then, this area of structured finance, which is innovative for Asia, has notably grown throughout the region. In China, securitisation is now able to develop into a significant financial instrument.
An increasing number of countries - including Japan, Korea, Malaysia, Thailand, Philippines, Taiwan and India - has put regulatory and legal frameworks into place to promote and facilitate the structured financing of securitisation. Lawyers see Japan and Korea as remaining the dominant markets for ABS issuance, while a steady flow of deals is coming out of Hong Kong, Singapore and Thailand.
Indonesia is also progressing to a further stage in its preliminary development of securitisation. Last year, a groundbreaking US$600m cross-border securitisation by IndoCoal Exports in Indonesia made the headlines, and won accolades for the 10 international and local firms involved. The deal has been awarded the "securitisation deal of the year" in many international law awards, including "SE Asia Structured Finance & Securitisation Deal of the Year" in the 2006 ALB Law Awards in Singapore.
However, many international firms have encountered an impediment in the progress of securitisation. Although the Asian securitisation market is generally growing, the deal volume is still low and only a handful of deals have been closed in the last 12 months. "The story of the Asian [securitisation] market is a bit choked, and full of ups and downs. Recently, it's been a little busier than it has for a while. But I would not say it is booming," says Clive Rough, the managing partner of Freshfields' Hong Kong office and the head of the Asian structured finance group. Rough's group has advised on a large proportion of high-profile transactions since the market commenced, building up a leading securitisation practice amongst international law firms in Asia.
There are demanding procedures involved in adopting the highly developed structured financing techniques of securitisation in a new jurisdiction which has a different legal foundation. Lawyers have largely found that the process also brings the satisfaction of practising in a new market rather than one that is already established.
China has now turned to securitisation, which is attracting the interest of firms with a practice area in the field. It is a market with a substantial asset base whereby large-scale and high-profile transactions can be easily obtained. "The really interesting new development in Asia is what is going on in the PRC," says Rough. "China accounts for a large part of our business planning." The firm has gained an advantage by being involved in the initial pilot securitisation deal in China.
A team led by Patrick Lines, another partner in the structured finance group, has advised China Construction Bank (CCB) on its notable US$380m domestic residential mortgage backed securitisation (RMBS). This is the first securitisation in the PRC and one of the two pilot projects. The same team played a minor role in the other pilot project, China Development Bank's ABS, by advising Fitch, the international ratings agency. "The good thing about China is the size of the domestc market, where there are vast conceivable [asset] pools. It is just going to get stronger all the time. There will be a diverse market with lots of different assets classes. We are very hopeful about the market and looking forward, but it will take time to develop," says Lines.
A new chapter
Following the pattern seen in other Asian economies, the relevant Chinese governmental authorities - the People's Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) - jointly issued regulations in 2005 and 2006 to enable asset securitisation companies to take over non-performing assets from banks and public financial institutions.
Largely based on the Trust Law and governed by PBOC and CBRC, two pilot projects have successfully achieved the country's first securitisations - CCB's MBS and CDB's Collateralised Loan Obligation (CLO). The success of these pilot projects is widely regarded as being significant in the development of securitisation in China. In this, three firms - King & Wood, Freshfields and Zhong Lun - have played a significant role. A King & Wood team led by Yang Xusheng and a Freshfields team led by Patrick Lines worked together on CCB's US$380m MBS deal.
Being the first to work in securitisation has not been straightforward for those involved, who have had additional demands made upon them to achieve the desired results. "The legal foundation was not really there. So we had to try to fit the CCB deal into the existing laws that weren't really made for securitisation. We were able to complete the deal based on a rather good trust law," says Lines. "But every step of the transaction had to be investigated to see whether it was legal or whether there was any way of doing it under the existing laws. Often it was extremely unclear, and we had to talk to all different levels of regulators trying to work out the solutions," he continues.
Yang Xusheng at King & Wood is in agreement concerning the challenges presented by the first deal. "When the regulations were issued by PBOC and CBRC last April, King & Wood took on most of the documentation drafting work," says Yang. "It was quite challenging at the time, as only two lawyers from King & Wood were working on the deal and there was no previous experience to draw upon." Due to the intricate steps required by securitisation, a large amount of research covering many different laws had to be done by the two-man team. The tight timeframe added to the pressure under which they worked.
Patrick Lines has given much credit to his counterparts. "Although it is a new technique for local firms, when every step of the transaction came up with a PRC law issue, we did rely on them a lot to do research and to help resolve the issue. We could suggest solutions and structural modifications, but they had to do a lot of reseach on Chinese laws," says Lines.
On the economic side, the legal service fee from the first pilot project barely covers the time that was dedicated to it. However, being involved has been a strategic move rather than one looking for immediate financial gain. Yang and his team have done a notable amount of voluntary consulting and lobbying work for the government, clients and investors. This work has contributed to the firm establishing a leading position in the emerging market and consequently enhancing its reputation. The CCB deal was awarded the 'securitisation deal of the year' in the ALB Hong Kong Law Awards in September this year.
More importantly, the CCB deal has created a special-purpose trust (SPT) as the new platform for securitisations, paving the way for other firms and banks to follow. Securitisation is regarded as an area having a very high threshold, but once some successful deals are completed, the rest of work tends to be routine. Yang notes the deals he acted on after the pilot deal took less time to close and cost less. At the moment, he is leading the team and working on five other deals. Due to the busier workflow, another securitisation partner has been taken on and the number of lawyers in the team has grown to six. Yang's perspective on the market of "cautious optimism" differs from that of Liu Borong, now with Zhong Lun.
Zhong Lun is another firm that is playing a significant role in the development of securitisation in PRC. The firm has advised China Development Bank, a policy lender specialising in infrastructure financing, on issuing securities worth US$645m, based on 62 loans it has made to 12 industries. The CDB deal is the first collateralised loan obligation in the country.
The securitisation team is headed by the firm's chair of the management committee, Zhang Xuebing. Under his leadership, the firm's practice in this area has been growing fast. Last year, the high-profile appointment of Liu Borong - a former securitisation partner in Global - added to the team's resources. Liu is currently the Secretary-General of the China Asset Securitization Forum and the Chairman of Asset Securitization Commission of the Beijing Lawyer Association. He has brought to the new firm his high profile and the projects he was advising on at the time, including CDB's pilot project and Shanghai Pudong Development Bank's securitisation.
Liu says that Zhong Lun's better platform and stronger resources determined his move to the firm. Since joining the firm, he has advised China Orient Asset Management Corporation (Orient AMC) on its US$1bn non-performing loan (NPL) securitisation project. This project is still waiting for approval from the government, but Liu is confident the first NPL transaction will go ahead by the end of this year.
Liu and his team are now working on another credit asset-backed securitisation project of a prestigious share-holding commercial bank and a number of other deals.
The standard securitisation product, backed by bank assets and traded in the PBOC-regulated inter-bank market, is more likely to see development in the next two to three years, as there is a better regulatory framework in place, says Liu.
The CCB and CDB deals have brought further progression, now there is significantly more interest in the market. Cinda AMC and five or six banks are reportedly in line to follow suit. However, there has not been a large number of deals because securitisation is still difficult to undertake and banks have no need to obtain further capital through securitisation.
A wave of SAMPs
In May 2005, a new and innovative product, tailored to meet the requirements of certain asset classes, was introduced by CSRC. The Specific Asset Management Plan (SAMP), also widely known as the Customer Asset Management Plan (CAMP), is a security paper issued by a securities company with the proceeds being invested in a particular corporate asset such as a future cash asset. It is traded in the exchange markets and regulated only by the CSRC.
The Yang-led team at King & Wood has acted on the first SAMP deal, the China Unicom SAMP, and raised US$1.2bn in total. According to Yang, the advising for the first SAMP was as challenging as the CCB pilot project. As there was no existing case to draw upon, it took approximately two years to structure the transaction and obtain approval from the government. Similar to the CCB deal, the China Unicom deal has established the basic legal structural framework for subsequent deals.
By the end of August 2006, there were nine SAMPs with a total value of US$3.33bn, compared to three credit asset-backed securitisation deals totalling US$1.63bn. "The SAMP has extended the securitisation market dramatically and opened up a new way for Chinese companies to raise funds. SAMP deals by large enterprises can have larger scale and higher value than the bank deals," says Yang. Following China Unicom, he advised on the US$1.3bn SAMP of China Netcom - the largest securitisation deal so far.
AllBright, the top-tier firm based in Shanghai, has advised five out of the nine listed SAMPs. The leading securitisation partner, Wang Zuojun, is hopeful about the market's future. "The demand from Chinese corporates for medium- to long-term financing is very strong and is going to become stronger. The SAMP structure successfully achieves the financing goal," says Wang. "It is an innovative financing technique introduced by the government and important for the current finance sector reform. It is a good way to relieve banks' medium- to long-term loans and a cost-effective way for corporates to raise capital," he continues.
Wang and his team are working on another five or six SAMPs. Recently, three partners from the firm's Shanghai office and five from the Shenzhen office have joined Wang's team to strengthen the practice area. However, Wang does not expect more SAMPs to be launched this year, as the CSRC is currently in the review process.
In addition, many lawyers have concerns about this structure, such as the weak legal foundations, lack of a consistent regulatory system and governance, unclear bankruptcy-remote structures and uncertain tax status. A number of key issues need to be resolved before the SAMP structure can further develop.
The cross-border deals timeframe
There have been several Chinese offshore securitisation products. The first one, the US$200m Zhuhai highway, dates back to 1996. In September 1997, China Ocean Shipping Co (Cosco) issued US$800m securities based on its future income. Global advised Cosco on PRC law during the deal. More recently, the GZI REIT has adopted the offshore structure and listed in Hong Kong.
A property fund led by Macquarie and the Dalian-based Wanda Group will use nine retail buildings as collateral and revenue stream for an offshore CMBS issuance to raise US$145m. Zhong Lun, Jun He, Paul Hastings and Mallesons Stephen Jaques are currently working on the deal.
Although most local lawyers see a long delay before cross-border deals take place in China, the expectation remains high and international firms are watching the market with interest. "We have made some good beginnings, and are working on other deals in China. The market has a lot of potential," says Rough of Freshfields. "I hope more transactions will come through, and would hope at some stage there will be some cross-border deals as well. But I don't think that will come soon," he continues.
Lines agrees: "We are not at that stage yet; it could be difficult to do a cross-border deal without a lot more work to be done. But people are pushing forward all the time and trying to do deals. So I think there will be advances over the next few years."