Research Publication: See China’s ABS Through the Lens of Domestic Structured Finance Ratings


27 Apr 2020

    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.

    ANALYST CONTACTS

    Primary Analyst

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@pyrating.com

    Secondary Analyst

    Shiyu Wang, PhD

    +86 755 8287 1237

    shiyu.wang@pyrating.com

    Committee Chair

    Tony Tang

    +852 3615 8278

    tony.tang@pyrating.com

    MEDIA ENQUIRIES

    Charley Lui

    +852 3615 8296

    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES

    Gloria Song

    +852 3615 8324

    gloria.song@pyrating.com

    Date of Relevant Rating Committee: 21 April 2020

    Additional information is available on www.pyrating.com.
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