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China Securitization Performance Watch 3Q 2020: Wider Variety Woos Offshore Investors

China's securitization market gained strength as the country's economic recovery accelerated and the impact of COVID-19 faded. Issuance volume bounced back in the third quarter of 2020 (3Q 2020), and pressure on asset performance gradually eased.

S&P Global Ratings expects offshore investors to be able to pick and choose from a wider variety of asset types and originators in the next few quarters. In the past quarter, we saw a slow yet steady trend of originators across retail credit sectors attempting to tap offshore investors.

Chart 1

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Regulatory Update

The transaction registration procedure was revised
  • On Sept. 30, 2020, China Banking and Insurance Regulatory Commission (CBIRC) announced a change in a regulatory step for credit asset-backed securitization with the aim of streamlining the regulatory review process.
  • Until recently, originators had to complete filing with the CBIRC on a deal-by-deal basis under an approved program issuance limit and receive the acknowledgement/acceptance of deal filing before they could submit to People's Bank of China.
  • Under the new step, originators will make deal-specific registration with Yindeng Centre from Nov. 13. The Yindeng Centre is a government agency set up in 2014 and supervised by CBIRC to take charge of activities related to financial assets such as registration, custodian, transfer, settlement, etc.
  • This change would shorten the time required to bring new transactions to the market, and we believe it is positive to China's securitization market development. The turnaround time is now three days for setting up a new account with Yindeng and another five working days from receipts of deal-specific registration, compared with the usual four to five weeks previously.
China's inaugural ABCP issuance hit the market
  • China launched its first asset-backed commercial paper (ABCP) in June 2020. The issuance consisted of five deals totaling Chinese renminbi (RMB) 3.32 billion (US$486 million).
  • The underlying assets are mainly composed of trade receivables. The issuance mostly stems from regulatory support to the real economy by broadening funding sources for corporations in the country.
  • Public information indicates that key participants in these transactions are either local banks or securities firms. These transactions seem to be set up as stand-alone ones, unlike typical ABCP conduits, of which commercial banks act as sponsors and continue to source assets to be funded by issuing ABCP over the life of the programs.
  • We believe it is too early to say how the ABCP sector will develop in China in the next two to three years. If regulators continue to promote them, the potential for ABCP issuances could be huge in the long run given China's sizable economy, the funding needs of Chinese companies, and the country's robust securitization market.

Yield Trend

Auto loan ABS coupons went back to the pre-COVID level
  • Market rates continued to trend upward in 3Q. The six-month Shanghai interbank offered rate moved up to 2.92% as of Sept. 30, 2020, back to a level similar to that in the pre-COVID period.
  • Coupons on the most senior tranches of auto loan asset-backed securities (ABS) were also tracking the market rate, and reached over 3% at the end of 3Q.
  • Optimism about the recovery from COVID-19 and a change in tone from policymakers ushered in expectations of tighter monetary policies, which are reflected in the market rate trend.

Chart 2

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New Issuance Trends

RMBS fueled the increase in total issuance in 3Q
  • New securitization issuance volume in 1Q-3Q 2020 increased by 11% year on year (YoY), to RMB1.63 trillion.
  • New issuances of RMB691 billion in 3Q offset the steep drop of 10.6% YoY in 2Q.
  • The recovery is mainly attributed to the return of some major bank originators with repeated RMBS issuance in this quarter.
  • Also, corporate receivables issuance grew significantly due to diversified funding needs. Issuance volume of account receivables ABS and supply chain receivables asset-backed notes surged to more than twice that in the first three quarters of 2019.
  • Auto loan ABS issuance has remained stable so far this year compared with the same period last year.
  • Originators across various retail credit sectors attempted to tap offshore investors. For example, China Merchants Bank made a foray into this investor segment, with its sponsored RMBS, which we rated.
  • We expect to see greater variety of asset types and originators available to offshore investors in the next few quarters.

Chart 3

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Chart 4

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Auto Loan ABS Issuance

Robust, more transactions with revolving structure came to market
  • Captive auto finance companies (AFCs) issued RMB40.1 billion across nine transactions in 3Q 2020, resulting in a 15.1% YoY growth in the first three quarters.
  • More local AFCs now come to make repeat issuances and attempt to tap offshore investors.
  • A greater number of transactions have adopted a revolving structure in the past 12 months, partly driven by funding efficiency and bank investors' needs. They are being typically designed with a revolving period of one to 12 months. Such structures could be subject to regulatory scrutiny.
  • Auto loans with new energy vehicles (NEVs) have started to be included in the securitized pool of our rated auto loan ABS. The portion has been minimal and will not materially affect the credit quality of the securitized pool. That said, given the growing NEV market, we expect auto loans backed by NEVs to increase over the medium term.

Chart 5

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RMBS Issuance

Revived, but still far behind that in 2019
  • In 3Q, 14 RMBS transactions totaling RMB99 billion were issued.
  • Issuance was about triple that in 2Q.
  • One of the reasons for the uplift is that major banks would like to speed up their issuance as the impact from COVID-19 gradually faded, so as to meet their issuance target.
  • We believe property market recovery and active mortgage loan origination since 2Q also contributed to the relatively active RMBS issuance in this quarter.
  • That said, total issuance in the first three quarters of 2020 is still far below that in the same period in 2019, a decline of 46%.
  • In October, we assigned ratings to Zhaoyin HeJia 2020-5 Residential Mortgage Backed Securitization Trust--the first time we rated RMBS sponsored by China Merchants Bank Co. Ltd.

Chart 6

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Auto Loan ABS Performance

Delinquency rates remained stable
  • Delinquency rates remained stable in 3Q as the COVID-19 impact eased and economic recovery accelerated.
  • The M1 ratio (1-30 days past due) has remained around 1% since July.
  • The M2 (31-60 days past due) and M3 (61-90 days past due) ratios have been largely flat. The weighted average M2 and M3 ratios in the overall sector declined to 0.10% and 0.07%, respectively.
  • The auto transactions we rate maintained low delinquencies. The weighted average M2 and M3 ratios of these rated transactions came down to 0.05% and 0.03% in September.

Chart 7

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Steady performance, with the cumulative default rate staying low
  • The cumulative default rate went up slightly in 3Q but overall remained low.
  • For 2018 and 2019 vintages, the rate increased by less than 8 basis points at the end of 3Q, compared to the previous quarter. The magnitude is similar to that in the pre-COVID period.
  • The steady performance reflects the stabilized conditions after the pandemic's peak and gradual improvement in the economy.
  • We believe the pressure on asset performance continues to ease but the evolving situation of the pandemic and global economic conditions could cause uncertainty ahead.

Chart 8

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RMBS Performance

Early delinquency rates hold steady
  • Delinquencies of 1-30 days stayed largely the same as that in 2Q. For our rated RMBS transactions, the M1 ratio came down to around 0.26% in September.
  • The M2 and M3 ratios remained below 0.1%.
  • Nevertheless, the M4+ ratio (90+ days past due) headed higher still. The delinquent loans due to COVID-19 staying within the overdue buckets without write-off led to a higher M4+ ratio of 0.46%.
  • We expect the M4+ ratio to continue to inch up in light of continued carryover from earlier delinquency buckets. It takes one to two years or even longer for mortgage servicers to work out severe delinquent and defaulted loans.

Chart 9

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Asset performance has been resilient since the outbreak
  • The increase in the cumulative default rate of most of the vintages was only 2bps-8bps as of the end of 3Q.
  • The cumulative default rate of most of the vintages stayed below 0.6%.
  • We believe the asset performance as of 3Q already thoroughly reflects the possible impact from COVID-19 on asset quality.
  • The pressure should continue to ease while some severe delinquent loans would slowly kick in when they fell into the default bucket.
  • However, in case of a second wave of infections or prolonged ripple effects from weak overseas markets, mortgage loan performance may suffer.

Chart 10

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Prepayment remained constant during 3Q
  • The constant prepayment rate (CPR) for bank-issued RMBS transactions remained about 12% in 3Q, after the rebound in March.
  • We expect the CPR to fluctuate between 8% and 12% in the medium term.

Chart 11

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New Issuances In Q1-Q3 2020

  • Bavarian Sky China 2020-1, Feb. 13, 2020
  • Rongteng 2020-1 Retail Auto Loan Securitization, March 12, 2020
  • Generation 2020-1 Retail Auto Mortgage Loan Securitization, March 13, 2020
  • Autopia China 2020-1 Retail Auto Mortgage Loan Securitization Trust, March 17, 2020
  • Silver Arrow China 2020-1 Retail Auto Loan Asset Backed Notes Trust, March 24, 2020
  • Driver China ten Trust, March 27, 2020
  • Bavarian Sky China Leasing 2020-1 Trust, April 17, 2020
  • Generation 2020-2 Retail Auto Mortgage Loan Securitization, May 19, 2020
  • VINZ 2020-1 Retail Auto Loan Asset-Backed Securities, June 19, 2020
  • Jianyuan 2020-2 Residential Mortgage Backed Securities, June 24, 2020
  • Bavarian Sky China 2020-2, July 10, 2020
  • Generation 2020-3 Retail Auto Mortgage Loan Securitization, Aug. 25, 2020
  • Silver Arrow China 2020-2 Retail Auto Loan Asset Backed Notes Trust, Sept.11 , 2020

This report does not constitute a rating action.

Related Research

  • China Property Watch: Issuers Go On A Debt Diet, Nov. 12, 2020
  • China's New Energy Vehicle Market Drives Into A New Era, Nov. 3, 2020
  • Economic Research: China's Careful Stimulus Dims Outlook For 2021, Oct. 19, 2020
  • Inside Global ABCP: Issuance Growth Tempered As Economic Recovery Takes Shape, Oct. 8, 2020
  • China Auto's Recovery Path Is Accelerating, Sep. 22, 2020
  • Economic Research: Asia-Pacific's Recovery: The Hard Work Begins, Sep. 24, 2020
  • A Primer On China's Residential Mortgage Backed Securities Market, June 24, 2020
  • Credit FAQ: What Do The First Performance Reports Reveal About COVID-19's Effects On China Auto ABS And RMBS?, March 26, 2020
  • Credit FAQ: How S&P Global Ratings Factors In The Potential Effects Of The COVID-19 Outbreak When Analyzing China Auto ABS and RMBS, March 4, 2020
  • China Structured Finance Outlook 2020: Performance To Diverge Amid Flat-To-Modest Issuance Growth, Feb. 6, 2020
  • China Auto ABS And RMBS Must Brace For Coronavirus Impact, Feb. 3, 2020
  • An Overview Of China's Auto Finance Market And Auto Loan Securitization, March 12, 2019
Primary Credit Analysts:KY Stephanie Wong, Hong Kong (852) 2533-3529;
ky.stephanie.wong@spglobal.com
Annie Wu, Hong Kong + 852 2532 8077;
annie.wu@spglobal.com
Secondary Contact:Jerry Fang, Hong Kong + 852 2533 3518;
jerry.fang@spglobal.com
Research Assistant:Carol Hu, Hong Kong

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