HONG KONG, 27 April 2020. Pengyuan International has released one research report, “See China’s ABS Through the Lens of Domestic Structured Finance Ratings”.
This research report attempts to bridge the gaps in understanding China’s ABS market by studying the rating transitions of the structured finance ratings issued by domestic rating agencies in China. We start with a review of the unique market structures of China’s ABS markets before analysing the characteristics of the structured finance rating transitions in China. We further examine the rating performance of the fee income rights ABS, which is a distinctive asset sector in China’s ABS market. Moreover, we provide comparisons between the corporate and structured finance rating transitions and attempt to explain the findings.
The following highlights some of the key findings:
Significant variations in the frequency and magnitude of the upgrades and downgrades in China’s structured finance ratings have been identified. The number of upgrades significantly exceeds the number of downgrades in China’s structured finance ratings. However, the magnitude of the downgrades is larger than the magnitude of upgrades on average.
Using China’s corporate rating transition as a benchmark, we find that the structured finance securities are less likely to be downgraded than similarly rated corporate securities; however, once a downgrade has occurred, the magnitude of the rating downgrade is generally higher in structured finance ratings than in corporate ratings.
The structured finance rating transitions demonstrate different patterns across issuance markets and asset sectors. Upgraded transactions are evenly distributed in the Corporate ABS and Credit ABS markets, while Corporate ABS contributed to almost all of the downgrades. In terms of asset sectors, the fee income rights ABS transactions account for the majority of downgrades, while the securitisation transactions backed by existing credit assets represent the largest proportion of upgrades.
The primary reasons for downgrading a fee income rights ABS are (1) an unexpected shortfall of the cashflows generated by the underlying assets; and (2) the deterioration in the credit quality of the originators or the third parties who provide the credit enhancements.
The observed features of structured finance rating transitions in China are primarily driven by the following factors: (1) the types of underlying assets; (2) the operational risks associated with originators and servicers; (3) the counterparty risks of transaction participants; (4) the idiosyncratic and systemic risks embedded in the securities; and (5) the failure to achieve insolvency remoteness.
Ke Chen, PhD
+852 3615 8316
Shiyu Wang, PhD
+86 755 8287 1237
+852 3615 8278
+852 3615 8296
RATING SERVICES ENQUIRIES
+852 3615 8324
Date of Relevant Rating Committee: 21 April 2020
Additional information is available on www.pyrating.com.
Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”) prepares various credit research and credit research related commentary (collectively “research”) in compliance with the established internal process. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.
The research is subject to disclaimers and certain limitations. RESEARCH AND CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF RESEARCH AND CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.
This research is based solely on the public data and information available to the authors at the time of publication of this research. For the purpose of this research, the Company obtains sufficient quality factual information from public sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses in the research. The Company is not responsible for any omissions, errors or inconsistencies of the public information used in the research.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.
This research focuses on observing trends from the credit markets. This research has not been made available to any issuer prior its distribution to the public. The Company does not receive compensation for its research.
The Company reserves the right to disseminate its research through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.
The Company’s research is not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor to ensure compliance with applicable laws and regulations.
Copyright © 2020 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.