HONG KONG, 19 April 2021. Pengyuan International has today published a research report “Property Firm’s ABS Accounting Treatment and its Impact”.
Regulatory oversight of the Chinese property industry has been considerably tightened since 2016, with traditional financing channels of these companies coming under more strict controls. Against this backdrop, the issuance of asset-backed securities (ABS) products in the Chinese property industry has accelerated substantially, buoyed by the increase in financing demand from companies in the sector. As of 29 December 2020, the accumulated value of ABS from Chinese property companies exceeded RMB1.4 trillion, becoming one of the important alternative financing tools.
Property ABS can be broken down into different categories according to their underlying assets, including supply chain ABS, mortgage balance ABS, property fee ABS, commercial mortgage-backed securities (“CMBS”) and quasi real estate investment trusts (“quasi-REITs”). Different ABS categories are subject to different accounting rules. For example, the supply chain ABS only needs to adjust the liability account items, while the property fee ABS, CMBS and the mortgage balance ABS are classified as secured debt financing, corresponding to the increased bank deposits and liabilities. Quasi-REITs are the only type of property ABS that could be classified as an off-balance sheet item. The on-balance sheet quasi-REITs represent an additional item of the issuer’s liabilities.
Property companies have accounting flexibility in treating the ABS products, which might lead to lower apparent debt ratios and inflate their repayment capacity. In addition, as most ABS products still rely on property companies to provide credit enhancement in China, the issuance of ABS might increase the contingent liabilities for the issuers. Therefore, recognising ABS financing as the companies’ interest-bearing debt could provide a better assessment of the property companies’ debt level and credit risk.
Since 2019, the approval progress of property ABS issuance has been slowed. The newly implemented “three-red-line” financing regulations of the property industry have comprehensively monitored various financing channels, including ABS for the property companies. Looking forward, it might be more difficult for property companies to issue ABS products and the companies with higher exposure to off-balance sheet liabilities will have more pressure. It is necessary to pay attention to relevant policy changes, and be alert to the refinancing pressure of those property developers with relatively higher reliance on ABS financing in the early stage.
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Date of Relevant Rating Committee: 16 April 2021
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