Chinese banks debut with renminbi securitisations

China Construction Bank (CCB) and China Development bank (CDB) have kicked off the first securitisation schemes by Chinese banks, with CCB issuing RMB3 billion ($373 million) worth of residential mortgage-backed securities (RMBS) and CDB issuing RMB4.18 billion of asset-backed securities (ABS) based on infrastructure loans.

Both issues were sold to participants in China’s interbank market, and the notes will start trading in the interbank bond market in a few months.

CCB’s RMBS comprises three rated tranches – AAA, AA and BBB – and an unrated first-loss tranche that was retained by CCB. Warren Lee, managing director and head of asset-backed securitisation for Asia at Standard Chartered Bank in Hong Kong, said: “In most ABS deals in Asia, even the double-A tranche is held by the originator. This is one of the first deals to come out of China, and they’re able to sell a triple-B tranche. That says a lot.” Standard Chartered Bank was the financial adviser to CCB for the transaction.

The AAA tranche, with a weighted average life of 3.15 years, totals RMB2.7 billion and pays monthly coupons based on a spread of 110bp per annum over the seven-day repo rate. The first monthly coupon based on an annual rate of 2.52% will be paid on January 26, 2006, and coupons for subsequent months will be reset five working days before the current month’s coupon is paid out.

The AA tranche, with a weighted average life of 9.24 years, totals RMB203.6 million and pays monthly coupons based on a spread of 170bp per annum over the seven-day repo rate. The BBB tranche, with a weighted average life of 9.3 years, totals RMB52.79 million and pays monthly coupons with a spread of 280bp over the seven-day repo rate.

Lee added: “China is keen to develop the securitisation market, so the main objective here is setting the standard for the future of the securitisation market in China. CCB’s total mortgage book is RMB350 billion, and while not all of that can be securitised, it has at least a 60% market share of the mortgage market, and we hope there’ll be other deals coming out.”

The underlying residential mortgages in the RMBS portfolio yield 5.3% per annum in interest income. CCB chose 15,162 lots of residential mortgages valued at over RMB3 billion from three branches – Shanghai, Jiangsu and Fujian – to form the asset pool.

Bankers said the RMBS transaction also helps to set a benchmark for where CCB could borrow money in future. CCB, which is rated AAA, last issued 10-year subordinated debt worth RMB60.7 billion in December 2004 at an interest rate of 200bp per annum over the seven-day repo rate.

Meanwhile, CDB also issued RMB4.18 billion of ABS largely covering its infrastructure loan assets, including electric power plants, railways, highways, airports and other infrastructure. CDB is a policy bank specialising in infrastructure funding.

The catalyst for China’s securitisation market came in March, when 12 regulatory bodies approved the pilot securitisation schemes by CCB and CDB. However, the two banks were beaten to the market in September by the second biggest mobile phone operator, China Unicom, which sold short-term paper worth RMB3.2 billion backed by telephone revenue streams.