Securitizations in China continue to face key challenges in legal enforceability, data robustness and integrity, as well as underwriting and servicing standards. These are some of the rating considerations Fitch would factor into its analysis of Chinese securitizations.
In a special report published last week, Fitch says true sale and bankruptcy remoteness are yet to be tested in Chinese securitizations under the specific asset management program (SAMP).
These transactions are weak in legal structure as they only rely on rules issued by the regulatory authority — Chinese Security Regulatory Commission. Because they are not enacted laws, it is possible that these rules may not be upheld in Chinese courts.
Lack of data robustness can be an impediment to the development of the securitization market in China. There is sometimes an unavailability of a long history of portfolio data that is generally required in securitizations, due to the short history of both certain asset classes and detailed collection of data.
Because China has had more than 30 years of continuous and rapid economic growth, portfolio data is therefore reported under an extended, benign economy and does not capture any stressful periods. Data such as this provides limited insight for gauging future performance, especially in an economic downturn.
Although market data can be used in the absence of individual portfolio data, such data is largely unavailable in China, as public disclosure of portfolio information is yet to be widely accepted and Chinese regulators do not aggregate and publish data by individual asset class.
Fitch expects more companies will tap the securitization market under both the SAMP and the credit asset securitization scheme after new rules expanded the eligible originators, asset classes and investors. Fitch expects these new originators to have robust underwriting policies and vigorous monitoring, servicing, collection and reporting procedures in place to meet standards required in a securitization.
Standards for securitization may be higher than what Chinese companies would normally adopt.
The article is based on a report, “Key Credit Challenges for China Securitization,” which is available at www.fitchratings.com.