According to the state council's national resource committee, the market value of the 290 companies currently listed in the central enterprise holdings is rmb 11. 1 trillion, or 20. 66 per cent of the total market value of the a stock market in the country. Central enterprises account for 63. 7 per cent of their assets and 60. 8 per cent of their net assets. Under the arrangement of the state committee on state council, in 2018 state enterprises will strengthen market value management to increase shareholder returns. With the increasing prominence of capital markets, national enterprises are expected to usher in a new wave of market value management and asset securitization。
At present, asset securitization has evolved into an important part of the financial system, with high growth rates maintained. Data from the national gold abs (asset securitization) cloud platform show that in march 2018 alone, 44 products were issued in the asset securitization market, with a total of rmb 102,941 million, representing an increase of 222 per cent, or 6 per cent over the same period. According to the annual report issued recently by the securities investment fund industry association, asset securitization operations continued to grow rapidly in 2017, with total issuances exceeding trillion yuan。
On november 17, last year, the central bank's joint banking commission, the cvm, the boi, and the fbo issued guidance on the regulation of asset management operations in financial institutions (approval draft), a document commonly known as the most rigorous “new rules for the management of financial assets” in history, which has had a significant impact on many operations, including abs operations。
Is securitization appropriate in today's economic environment? Where's its way out
The initial significance of asset securitization is that it transforms less liquid products into better liquid products through a certain structure. For example, the initial asset pool in asset securitization is often a liquid, non-tradable loan, through the framework of asset securitization, where investors receive fixed-income bonds that are tradable in financial markets, liquid and with various credit ratings. In this sense, securitization of assets is itself a remarkable financial innovation that has made it possible to convert non-tradable products into tradable products. Since products can be traded in financial markets, fair trends in their prices are guaranteed. This is achieved by reference to the theory of market pricing。
The securitization of financial assets began in the united states in 1930. The stock exchange market collapsed during the great depression. In order to obtain financing, issuers can only finance by securitizing housing loans and selling them to investors. The initial securitization was mostly in the area of real estate loans, then slowly extended to other areas such as regular loans and bonds, and later into the area of leasing。
So, in the current economic climate, is asset securitization the right way to finance? We look at several dimensions — the general economic environment, the characteristics of securitized assets, etc。
Financial markets need to be equipped to use such financing. For example, a low interest rate environment can make asset securitization difficult. At the heart of asset securitization is the idea of securitization through the packaging of fixed and regular asset cash flows, through a certain economic and legal framework, into marketable, profitable securities. This raises the question of how much structure there is in the asset pool。
In an environment of low interest rates, on the one hand, the likelihood of loss of assets is increasing; on the other hand, low interest rates result in limited cash flows. Thus, when both situations coexist, the proceeds of securities sold to investors after securitization may be affected accordingly, in particular the spread of the later layers. This is due to the advantage that asset securitization has the advantage of upgrading the cash flow of assets through different methods, while a high level of default will inevitably put pressure on the layers and reduce their space. For example, the average yield on asset pool loans is 4 per cent, and after a subcontracting segment, the yield on high-level bonds needs to be no less than 3 per cent below the market level. Thus, the margin of return left for intermediate-level and equity-type assets would be small — because of the need to scale up assets that generate cash flows that support layer upgrading. Only then can potential losses be covered。
So we believe that the low interest rate environment is not appropriate for asset securitization. In particular, in the current economic environment of rising interest rates, where securitized loans or bonds themselves are expected to yield less than the current rate of interest, it is almost impossible to pack and subsequently generate economically attractive portfolio investment。
The securitization of assets also requires the assets targeted in the asset pool. Typically, assets used for asset securitization include loans, bonds, lease income, etc. The selection of these assets requires certain criteria: performance meets certain requirements, decentralization requirements, industry standard requirements, minimum yield levels, maximum maturity period, etc。
For potentially selected assets, their default losses cannot be arbitrary. That is to say, the quality of the targeted assets (whether loans or bonds) meets the required conditions. Those assets of very poor quality are not recommended for packing in order to protect investors。
There was a misunderstanding about asset securitization as “bad money laundering”, which was wrong. It essentially addressed the issue of financing and liquidity of assets, rather than eliminating bad debts. Only if the pool produces the expected return can the gains from securitized securities products be guaranteed. So asset securitization is not a magic from scratch. Institutionally, asset securitization is a financial architecture approach that diversifys products and does not itself generate gains through the architecture. Under the current circumstances, the international financial market is characterized by a high level of bad and bad debt, and the risk of these products being packaged is extremely high and their performance falls short of what is normally required for asset performance on target. So whether it be bank loans or corporate bonds, we suggest that it be handled with caution in the process of securitization of assets。
The decentralization of assets in asset pools was also required in the context of the architecture. This is in line with the general requirement of portfolio management: to avoid concentration of risk resulting in a concentration loss. In the securitization of existing loan assets, individual consumer loans are more numerous: this is reflected both in the type of consumer loans and in the geographical location in which they are granted, and in their concentration. The risk of non-compliance is therefore higher than the risk of decentralization. In addition, since current consumer loans do not have qualified collateral, there is a high risk that, in the event of default, there will actually be no reliable asset to collateralize。
There are also requirements for the maturity of assets in the asset pool due to the risk characteristics of financial products in financial markets. Generally speaking, the maturity period of a post-layered security will not exceed five years because of the high volatility of interest rates on long-term bonds and their corresponding high interest rate risk. This adds a risk factor to the unprovoked securitization of assets。
We usually recommend the use of loans and bonds over a period of five years as assets and determine the maturity of the various tiers according to their income characteristics. For example, in the case of part of a loan or bond, there is greater stability in the early generation of the proceeds, so that this part of the stable, early earnings can be securitized into short-term high-level bonds when packaged. Other levels of securitization products are generated by such push, depending on the degree of stability of duration and earnings. Let us give an example: assuming a group of project loans, they have a low risk of default at an early stage (for example, in the first year) and relatively stable returns. Thus, a one-year, phased high-level bond could be securitized for the benefit of this feature. The maturity of a one-year period is determined by the time the bond defaults; the high-level bond is determined by its risk characteristics. Together, they define the characteristics of that level。
As a result, some of the asset securitization products issued at the moment are of excessive duration and we believe they can be improved。
Asset securitization is a complex process of financial architecture, which is difficult not only in terms of the position and technology required to design the product, but also in terms of the external economic environment for the rational use of asset securitization. Therefore, it was suggested that the securitization of assets should be carried out with caution。
(associate professor, toji university, faculty of law)
