Advantages, opportunities in rebooting NPA securitization

The crash brought on by the subprime lending crisis in the US in 2008 caused markets around the world to reconsider financial derivatives, and the business of securitizing non-performing assets (NPAs) was also suspended for a time in China. However, with the increasing pressures felt as a result of the weakening Chinese economy, the rate of NPAs has continued to rise for several consecutive quarters and the market has searched high and low for a means to dispose of such assets. The market has therefore taken a second look at NPA securitization.

The issuance of the Guidelines for Information Disclosures Relating to Non-Performing Loan Asset Backed Securities (Draft for Comment) in 2016 is a harbinger of the imminent restart of non-performing loan securitization. Many NPAs are mainly caused by a short-term cash flow shortage, and if a significant quantity of funds can be committed, the NPAs have a good chance to become quality assets.

In financing terms, the advantages of asset securitization are obvious. First, the financing costs are low. Disposing of NPAs requires a large cash flow, while management of the same requires large costs. In asset securitization, the use costs of the financing proceeds are relatively low; compared to bank loans, relatively high interest rates can be avoided; and compared to equity financing, the financing costs can be reduced while the enterprise’s organizational structure is maintained. Additionally, the limit imposed by the credit rating of the NPAs themselves may be overcome through credit enhancement, to issue securities of a higher rating.

Lü Liqiu is a partner in the Beijing office of Guantao Law Firm. She can be contacted on +86 10 6657 8066 or by email at llq@guantao.com
Gu Fang is an associate in the Beijing office of Guantao Law Firm. He can be contacted on +86 10 6657 8066 or by email at gufang@guantao.com