Key Takeaways
- We expect new securitization issuance in China to fall for another year amid slowing economic growth.
- We have lowered our 2024 issuance forecast to RMB1.65 trillion (US$227 billion)--equivalent to a drop of about 12% from 2023.
- Our ratings on Chinese residential mortgage-backed securities, auto loan ABS, and consumer loan ABS should remain stable for 'AAA' rated tranches and stable to positive for other classes in the investment-grade rating category.
- Important sector trends to watch include regulatory dynamics and financial debentures' effects on ABS issuance, the relatively promising prospects of lease-backed securitization, and resilient growth in micro and small enterprise loans ABS, among others.
Issuance in China's structured finance market will drop for the third consecutive year in 2024 after declining 10% year on year during the first half. Subdued economic conditions may continue to slow issuance of asset-backed securities (ABS) in the second half. We estimate new issuance in the full year will fall by about 12% to approximately Chinese renminbi (RMB) 1.65 trillion.
Amid the slowdown in economic growth, the structured finance market has endured stagnant issuance of residential mortgage-backed securities (RMBS) and notable drops in certain ABS sectors during the first half of 2024. From a ratings perspective, the performance of securitization transactions that we rate will remain quite steady, thanks to favorable asset features and structural support.
This article discusses our revised forecast for issuance volumes in 2024, as well as key risk factors and trends in China's securitization market.
New Issuance Likely To Shrink In 2024
The lack of visibility on RMBS issuance and weak momentum in the issuance of auto loan and corporate risk-related ABS have prompted us to lower our 2024 issuance forecast to RMB1.65 trillion (US$227 billion). This represents about a 12% year-on-year drop.
Securitization issuance dropped 10% year over year to RMB0.77 trillion (US$106 billion) during the first half of 2024. The slump in issuance largely stems from a decline in key asset classes such as auto loan ABS and supply chain ABS.
RMBS issuance has remained muted since February 2022 amid a persistent property market downturn and sluggish mortgage originations in China. We do not expect RMBS issuance to resume until the second half of 2025 at the earliest, based upon sector fundamentals. Auto ABS and supply chain ABS fell 36% and 40% to RMB56.4 billion and RMB43.8 billion, respectively, in the first half of 2024. We believe this is because of weaker economic activity dampening demand for financing during the period.
The trend for consumer loan ABS issuances under various regulatory regimes diverged. Issuance under the credit ABS scheme was RMB11.8 billion in the first half of 2024, representing a 36% year-on-year drop. On the other hand, issuance under the China Securities Regulatory Commission (CSRC) scheme increased 42% over the same period to RMB52.0 billion. Issuance momentum has changed drastically, largely due to evolving regulatory dynamics under different issuance regimes in the past few quarters. Issuance also depends on originators' funding needs and choice of funding instruments (see Other Top Trends To Watch below).
Ratings Remain Largely Stable
We expect our ratings on Chinese RMBS, auto loan ABS, and consumer loan ABS to remain stable for 'AAA' rated tranches and stable to positive for other investment-grade ('AA+' through 'BBB-') rated classes. We base this on our forecast of largely stable collateral performance and increased credit enhancement for most amortizing transactions.
Other Top Trends To Watch
Below are some key themes to watch out for in the second half of 2024.
Finance companies' issuance of financial debentures will weigh on ABS issuance
More and more consumer finance companies (CFCs) and auto finance companies (AFCs) have issued financial debentures to fund business growth after China's regulator released issuance guidelines for nonbank financial institutions in November 2023. In the first half of this year, six CFCs issued 15 financial debentures with a total amount of RMB25.5 billion. AFCs, such as Genius, Mercedes-Benz, and Great Wall Binyin, also issued financial debentures during the same period.
Financial debentures can provide nonbank issuers more flexibility in financing tenor, compared with ABS backed by consumer loans or auto loans, which have shorter asset tenors and deal maturities. Three years is a common tenor for financial debentures, longer than that of ABS. The weighted-average tenor of consumer loan and auto loan ABS typically ranges from one to two years. In addition, financial debentures allow issuers to broaden their investor base, given the securities' different nature of risk and investor preference.
That said, ABS remains a crucial funding instrument for finance companies because it can enable lower funding cost than debentures for structural benefits. Also, for finance companies that do not qualify to issue debentures, ABS can provide another channel to obtain funding.
We anticipate future issuance of consumer loan ABS and auto loan ABS will depend on originators' funding needs, asset-liability duration management, and preferred funding mix.
Relatively promising prospects of lease-backed securitization amid slowing issuance
While China's economic slowdown dragged down issuance across most sectors in the first half of 2024, lease-backed securitization was one of the least affected sectors. Total issuance reached RMB137.6 billion in the first half of 2024, accounting for the highest amount among all asset types, despite a 7% decline from 147.8 billion in the first half of 2023.
Some leasing companies have repeated issuances almost every month for ongoing funding needs. Far East Leasing, for example, is the most frequent issuer, with nine transactions totaling RMB18.8 billion issued in the first half of 2024.
About 87% of lease-backed securitizations are issued under the CSRC scheme. We expect the issuance momentum of leasing ABS to persist in 2024, considering fundamental demand in the leasing market and investors' search for opportunities in the absence of RMBS issuance and less issuance of auto loan ABS. Also, issuers are likely to tap a broader offshore investor base, given market participants' increasing familiarity with this asset type.
MSE loan ABS is a bright spot seeing resilient growth
Through various regulatory measures, Chinese policymakers have been encouraging growth in the micro and small enterprise (MSE) sector as a key economic growth driver. Over the past decade, MSE loans have seen steady growth, which drove increasing demand for MSE loan ABS. In the first half of 2024, MSE loan securitization under the credit ABS scheme increased about 60%, which is the highest among all asset types, despite its low base of about RMB32.6 billion when compared with issuance of auto loan ABS and consumer loan ABS.
With government support, certain banks will continue to emphasize MSE loan origination, in our view. This may further boost MSE loan securitization issuance for banks' financing needs.
Besides bank originators, some nonbank MSE lenders also contribute to the MSE loan growth and securitization issuance under CSRC or National Association of Financial Market Institutional Investors (NAFMII) schemes. With growing MSE ABS issuance, risk factors specific to this asset class such as obligor concentration and the sensitivity of asset performance to macroeconomic conditions are drawing increasing market attention. To address such risks, S&P Global Ratings considers both originator-specific historical performance as well as obligor concentration of initial pool cut and eligibility criteria related to obligor concentration when it rates a deal.
Dual underwriting structure requires additional rating consideration
Nonlicensed loan facilitators and originators that are not eligible to issue ABS under the credit ABS scheme have increasingly cooperated with trust companies to issue exchange ABS under the CSRC scheme or ABN under the NAFMII scheme. For example, a loan facilitator assesses the creditworthiness of a consumer loan applicant, refers that loan application to a partnered trust company for another credit assessment, and disburses the loan if approved. The trust company then securitizes the loan and issues ABS.
This helps increase the variety of originator types and asset characteristics. Each of the top active trust companies issued 20-30 transactions in the first half of 2024. Most transactions are securitizations backed by consumer or MSE loans.
Transactions whose initial loan facilitator cooperated with a trust company as loan originator enjoy dual underwriting in the loan origination process. However, this kind of structure also involves extra risks, especially when a transaction adopts specific asset-selection criteria, making the securitized pool's features distinct from the mother pool's. This complicates risk dynamics from both credit and operational perspectives, and would require more sophisticated analyses and close watch. To address such risks, S&P Global Ratings would usually take additional steps, such as having in-depth meetings with both the initial loan facilitator and the trust company.
Related Research
- China Securitization ABS And RMBS Tracker May 2024, June 28, 2024
- Credit Conditions Asia-Pacific Q3 2024: A Trade Showdown Unfolds, June 24, 2024
- China Securitization Performance Watch 1Q 2024: A Slow Start For Issuance, May 16, 2024
- Credit FAQ: What's Behind Our First 'AAA (sf)' Rating Assigned To Chinese Exchange ABS?, May 9, 2024
- A Comparative Overview Of Select China Consumer Loan ABS, Jan. 22, 2024
- China Structured Finance Outlook 2024: Consumer ABS A Bright Spot Amid Flat Total Issuance, Jan. 11, 2024
- How We Rate China Leasing Securitizations, Oct. 12, 2023
- China Mortgage Rate Cuts Will Help Home Buyers And Won't Hurt Rated RMBS, Oct. 10, 2023
- Credit FAQ: What's Behind The First 'AAA (sf)' Rating Assigned To Chinese Consumer Finance ABS?, Aug. 24, 2023
- A Primer On China's Consumer Loan ABS Market, June 9, 2023
- A Primer On China's MSE Loan ABS Market, May 10, 2023
- A Primer On Hong Kong's RMBS Market, April 13, 2023
- A Primer On China's Equipment Lease ABS Market, March 2, 2023
- A Primer On Hong Kong's Consumer Finance Asset-Backed Securities Market, Sept. 22, 2022
- A Primer On China's Residential Mortgage-Backed Securities Market, May 24, 2022
- A Primer On China's Auto Loan Asset-Backed Securities Market, April 28, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrea Lin, Hong Kong + 852 2532 8072; andrea.lin@spglobal.com |
| Secondary Contacts: | Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com |
| Yilin Lou, Hong Kong +852 2533 3524; yilin.lou@spglobal.com |
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