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01 current issuance of asset securitization products of urban investment supply chain in China

Urban investment company, the abbreviation of urban construction investment company, refers to an economic entity established by local governments and their departments and institutions through financial allocation or injection of land, equity and other assets, which is engaged in the financing, investment, construction and operation of public welfare or quasi public welfare projects designated or entrusted by the government, and has an independent legal personality. The bonds issued by the urban investment company include credit bonds, ABS, etc. the traditional urban investment ABS mainly includes charging income rights and affordable housing. Supply chain asset securitization is a new type of urban investment ABS emerging in recent years.

Before 2020, the core enterprises of supply chain asset securitization products are mainly concentrated in real estate, construction, manufacturing and other industries (basic assets), with little participation of urban investment companies. Since 2020, the issuance of asset securitization products of urban investment supply chain has accelerated. In 2021, the number of issuance orders and scale of urban investment supply chain asset securitization products increased significantly year-on-year. According to the available data, in 2020, 17 urban investment supply chain asset securitization products were issued, with an amount of 4.5 billion. In 2021, the urban investment supply chain asset securitization products issued 39, with an issuance amount of 15.6 billion yuan.

In July, 2021, the China Banking and Insurance Regulatory Commission (CBRC) issued the guiding opinions for bancassurance institutions to further improve the risk prevention and resolution of local government implicit debt (ybjf [2021] No. 15, hereinafter referred to as "No. 15 document"), in which the main provisions related to the financing of urban investment companies include: (1) no new local government implicit debt in any form. (2) Classified management to strengthen the management of new financing of financing platform companies. Bancassurance institutions shall implement classified management according to the query results of the monitoring platform for corporate debt and medium and long-term expenditure matters of the financing platform of the Ministry of finance. For customers that do not involve local government implicit debt, prevent new local government implicit debt. No new working capital loans or financing in the nature of working capital loans shall be provided to customers who undertake implicit debts of local governments. (3) We will properly resolve the existing implicit debts of local governments. The issuance of Document No. 15 has had a great impact on the financing activities of urban investment companies, especially those involving the implicit debt of local governments.

From the monthly issuance of the supply chain asset securitization products of the urban investment, the number of issuance of the supply chain asset securitization products of the urban investment reached a high point in July 2021, and decreased significantly in the following months, which coincided with the release time of Document No. 15. According to the available data, 10 urban investment supply chain asset securitization products were successfully issued in a single month in July 2021, while only 9 supply chain asset securitization products were successfully issued in the five months from the beginning of August 2021 to the end of 2021. It can be seen that since August 2021, the issuance of urban investment supply chain asset securitization products has slowed down, but there are still successful issuance cases of urban investment companies at or above the prefecture level that are at or above the subject level aa+ and do not involve hidden bonds.

By the end of March 2022, from the perspective of the distribution of core enterprise credit levels, the urban investment companies with core enterprise entity level of aa+ have issued the most, accounting for 75%, followed by AAA urban investment companies, accounting for 23%, and AA urban investment companies account for very few. Only one issuance case has been found, which is the special asset support plan for CICC Western Shaanxi credit enhancement supply chain finance No. 1. The core debtor is Weinan Urban Investment Group Co., Ltd, In addition, a third-party credit enhancement institution provides difference payment, and the difference payment commitment is Shaanxi credit promotion Co., Ltd. Generally speaking, the main body level of core enterprises involved in the asset securitization products of urban investment supply chain is aa+ or above, and the overall qualification of core enterprises is good.

02 urban investment supply chain ABS transaction structure and product features

The basic assets of urban investment supply chain ABS are generally the accounts receivable creditor's rights and its subsidiary interests (which are essentially creditor's rights and can be recognized by accounting) enjoyed by the original owner transferred to the manager on the establishment date of the special plan. The types of accounts receivable mainly include engineering, trade, procurement, service and others (design fee, supervision fee, testing fee, etc.). Among them, the engineering category refers to the creditor's rights of accounts receivable enjoyed by suppliers for providing engineering services to the urban investment company and its subsidiaries; The trade category refers to the accounts payable claims formed by suppliers providing goods to the urban investment company and its subsidiaries.

The urban investment company mainly achieves external credit enhancement through two ways: one is to issue the payment confirmation as a joint debtor and make a payment commitment for each payable of the subsidiary; Second, as the difference payment commitment party, it provides the difference compensation obligation for the principal and interest payment of ABS priority securities. The above credit enhancement method determines that the payment guarantee of urban investment supply chain ABS comes from the core enterprise. In the absence of a third-party balance supplement or guarantee, the debt level is generally equal to the credit level of the core enterprise.

In terms of transaction structure, urban investment supply chain ABS mostly adopts the "1+n" reverse factoring mode, in which "1" is the core enterprise, i.e. urban investment company, with a high credit level; "N" is an upstream supplier, usually with a low credit level or a large difference in credit level. The main transaction processes include: the initial creditor (i.e. the upstream supplier) enjoys the accounts receivable creditor's rights against the debtor due to providing services and goods to the urban investment company or its subsidiaries; The initial creditor signed the accounts receivable transfer contract with the factoring company, transferred the accounts receivable creditor's rights to the factoring company, and agreed that the factoring company would transfer them as basic assets to the special plan. The initial creditor and the factoring company respectively sent the notice of assignment of accounts receivable creditor's rights to the debtor. The debtor shall issue the buyer's confirmation letter to confirm the rights of the underlying assets after receiving the above notice of assignment of accounts receivable creditor's rights.

The transaction structure of the urban investment supply chain ABN and the urban investment supply chain ABS (regulatory system of the China Securities Regulatory Commission) are basically similar. The difference is that trust companies are usually introduced into the urban investment supply chain ABN as the issuing carrier management organization and trustee (regulatory system of the China Banking Regulatory Commission). As the initiator, the factoring company signed the trust contract with the trust company, and the factoring company transferred its legally owned basic assets (accounts receivable claims and subsidiary interests) to the trustee (trust company) to establish a trust as the issuance carrier of asset-backed notes.

Based on the above transaction structure, urban investment supply chain ABS mainly has the following characteristics: (1) reverse factoring. The factoring business in the urban investment supply chain ABS is usually carried out under the leadership of the debtor (urban investment company and its subsidiaries), which is different from the forward factoring business led by the creditor (Supplier). (2) Class credit debt. If the initial debtor of the urban investment supply chain ABS is a subsidiary of the urban investment enterprise, the initial debtor usually has weak qualifications. As a core enterprise, the urban investment company has become the common debtor of all pooled assets by issuing the payment confirmation, or has increased the credit of products by providing balance supplement. Therefore, the level of debt basically depends on the credit status of the core enterprise, which makes the urban investment supply chain ABS have strong credit like debt characteristics. (3) Shelf storage declaration and issue by stages. Due to the high homogeneity of the underlying assets and the similar transaction structure of each period, the supply chain ABS products can be issued in stages by shelf declaration. (4) The term is short and the principal is repaid at maturity. ABS products in the supply chain of urban investment are generally short-term, mostly one-year or less, and the principal and interest are usually repaid once due.

(to be continued)