On 2 June 2020, the National Association of Financial Market Institutional Investors (NAFMII) announced the launch of five transactions under a novel pilot project, introducing asset-backed commercial paper (ABCP) to the securitisation landscape in Mainland China. The announcement is available here.
Global importance of ABCP
ABCP has been a key feature of the securitisation ecosystem in Europe and the United States for decades and has helped deliver flexible cost-efficient funding to support core parts of the real economy -- financing trade receivables, credit cards and auto-loans, among others. In particular, ABCP is seen as a critical component of helping deliver capital markets funding to individuals and businesses, including SMEs, and was even given a special regime under the EU Securitisation Regulation when it came into force in 2019. More recently, in the EU, a simple, transparent and standardised framework for ABCP will allow regulated investors to benefit from preferential capital treatment when they invest in qualifying ABCP programmes.
Flexibility of ABCP
Broadly speaking, ABCP is a very short term debt instrument issued by a special purpose vehicle or trust to fund a fluctuating pool of underlying assets, such as trade receivables, auto leases or credit card receivables. ABCP provides the investor with recourse to the cashflows from the underlying assets, which are ring-fenced from the credit risk of the originator (e.g., a corporate in the case of trade receivables, the car finance provider in the case of auto leases or a bank in the case of credit cards). The ability of ABCP to provide fluctuating levels of funding allows the corporate, finance provider or bank to access the precise amount of funding they need for the assets at any point in time; they do not need to pay for funding unless they need it.
It is this flexibility to fund oscillating pools of ring-fenced assets that has been absent from the blossoming domestic Chinese securitisation market to date. NAFMII's new ABCP product can provide this flexibility, permitting a fluctuating pool of ring-fenced assets to be funded dynamically by varying levels of funding over the life of the transaction. NAFMII recognises this new feature as a re-invention of existing Chinese securitisation tools to bring the benefit of the capital markets directly to real economic activity -- in particular, helping SMEs fund their day-to-day trading activities. The pilot projects announced by NAFMII all follow this theme -- the underlying assets being trade receivables and leasing receivables.
Offshore investors
While there are few details available to date on exactly how they would participate, NAFMII proposes that the new Chinese ABCP product could appeal to international investors, meeting their diversified investment needs and helping increase foreign participation in the Chinese bond markets. This reflects the growing presence of foreign investors in China's bond markets in recent years -- China Central Depository & Clearing and Shanghai Clearing House data show that at the end of April 2020 foreign investors were holding approximately US$325 billion worth of Chinese bonds through a variety of channels, including Bond Connect and RQFII.
International supply chain and receivables finance
The new Chinese ABCP product may also offer the opportunity to include trade receivables which arise in supply chains in Mainland China in global receivables funding platforms bringing strength and depth not only to the international investors who finance those platforms, but by giving valuable cost-effective working capital to Chinese suppliers whose receivables are included.
Data snapshot
Mainland China ABCP Market Size
The five pilot projects launched under the NAFMII ABCP scheme in June 2020 have an aggregate programme size of approximately US$468 million, of which approximately US$198 million is to be issued on launch.
Global ABCP Markets (Source: S&P Global Ratings)
United States - US$267.2 billion (April 2020)
EMEA - US$98.9 billion (December 2019)
Japan - US$1.93 billion (December 2019)
Australia - US$209 million (December 2019)
