Moody's Investors Service says that the Chinese government -- recognising the economic importance of the country's small- and medium-sized enterprises (SMEs) -- is actively encouraging the development of the SME loan securitisation market to help the sector gain better access to funding.
Moody's notes that the first Chinese SME CLO (collateralised loan obligations) securitisation since the global credit crisis, Alibaba SME CLO, debuted in July.
This transaction emerged against the backdrop of the State Council's various recommendations and policy initiatives to further support SMEs, such as improving the operating environment and services, offering fiscal assistance, and introducing various funding channels.
Moody's conclusions were contained in a just-released special comment, titled "Roles and Key Credit Risk Considerations of Chinese SME Securitisations."
The Moody's report looks at the importance of SMEs in Chinese economic development and how SME loan securitizations can play a role in promoting SME development.
Moody's uses the SME CLO launched in July by Alibaba to illustrate the significance of SME CLOs, and discusses some of the salient and welcoming aspects of the transaction. Moody's sees this transaction an important milestone for China's renewed interest in securitization.
Moody's highlights three key credit considerations for evaluating the credit quality and performance of Chinese SME CLOs: loan performance data and performance characteristics; loan underwriting, origination and servicing; and transaction credit enhancements and structural features.
The report explains how the Alibaba SME CLO addresses these considerations through internal and external credit enhancements, portfolio diversification, and strong underwriting and servicing standards and systems.
The report says that the latest government policies and initiatives clearly indicate that the authorities will encourage and facilitate the securitization of SME loans, made by both banks and special lenders, to increase the liquidity of loan assets, provide sustainable funding to SMEs, and transfer the excessive risks hidden in the financial system to a diversified and more transparent investor base.
Moody's notes that the use of securitisation is not without associated risks and has to be handled with care. Transaction parties and investors need to incorporate ways to address key credit considerations, and learn from the experience of securitisation in the advanced economies.
Finally, the growth of SME CLOs as an asset class in China will depend on, in addition to continued government support, overcoming the general lack of familiarity with structured products in China, the presence of sufficient economic incentives, improvements in the transparency, now limited, of the underlying loans, and a strengthening in the related legal and regulatory frameworks.
Highlighting the importance of SMEs, China's Ministry of Industry and Information Technology says their output is equivalent to about 60% of the Mainland's GDP. It also says that SMEs account for 99% of the country's registered enterprises.