The dual SPV: tips on how to proceed during policy transition

At a press conference held on 8 March 2014, the China Securities Regulatory Commission (CSRC) stated it would comprehensively spur the extensive development of the asset securitisation business this year and plan for the promotion of corporate asset and credit asset securitisation.

The CSRC has now abolished administrative permissions for the dedicated asset management plans of securities companies, further returning power to the market, and is additionally continuing to promote the listing of credit asset securitisation products on the stock exchanges, while vigorously developing accounts receivable securitisation and other such corporate asset securitisation. The CSRC will also strengthen prudential oversight at each stage of securitisation, and in light of the legislative and regulatory experience of mature markets, strengthen legislative research, make legislative proposals, and actively promote the improvement of the basic legal systems, accounting systems and tax systems relating to asset securitisation.

Dual SPV model

We have learned from relevant authorities that until the CSRC issues new regulations on asset securitisation, securities companies may continue to engage in asset securitisation business by other means, for example establishing a pooled asset management plan through a securities company to raise funds and use those proceeds to purchase into the dedicated asset management plan of a fund subsidiary, with the dedicated asset management plan of the fund subsidiary then linking the corresponding underlying assets.

An application may be made to list the above-mentioned pooled asset management plan of the securities company on the Shanghai Stock Exchange or Shenzhen Stock Exchange. The securitisation of the relevant underlying assets can thus be realised through this unique “dual SPV” (special purpose vehicle) model.

The dual SPV structure has been tested in practice. Huarong Leasing, as the original rights holder, successfully realised the securitisation of assets in the form of RMB533 million (US$86.3 million) in accounts receivable and listed these on the Shenzhen Stock Exchange in November last year. The above-mentioned dual SPV model of a “small pool” nesting a “fund subsidiary dedicated plan” is precisely what was used in this project. This product was also the first innovative product involving the securitisation of lease financing assets to make an appearance on the Shenzhen Stock Exchange. Furthermore, in January this year, the GF credit card asset securitisation project was listed on the Shanghai Stock Exchange, also providing a new channel for the securitisation of the assets of financial institutions.

The dual SPV model is not in essence greatly different from typical asset-backed securitisation (ABS). It uses a product medium and product structure that only requires recordal, rather than approval, flexibly applies the various techniques of asset securitisation, thereby enhancing the success rate, while saving on the time that would normally be required for approval, and has relatively robust practical operational significance. The dual SPV model is also an effective supplement to the two main types of asset securitisation, namely corporate securitisation and credit asset securitisation involving a trust plan nesting a “securities brokerage asset management plan”.

Offer method

The offer method for the dual SPV model is as follows: listing and trading on a stock exchange after the raising of funds. Its advantage is that only recordal, rather than approval, is required for the entire process.

The transaction structure mainly involves the securities company first raising funds and establishing a pooled plan in accordance with relevant provisions of the Administrative Measures for the Client Asset Management Business of Securities Companies and the Implementing Rules for the Pooled Asset Management Business of Securities Companies, followed by the establishment of a preferred/common dedicated plan through a fund subsidiary in accordance with relevant provisions of the Tentative Measures for the Specific Customer Asset Management Business of Fund Management Companies and the Interim Administrative Provisions for Subsidiaries of Securities Investment Fund Management Companies. The fund subsidiary uses the proceeds from the offering of preferred units to purchase the underlying assets.

It should be noted that in the course of the recordal, as well as the listing and sale of the products of the dual SPV structure, the regulatory authorities will still, to a certain extent, carry out a compliance examination and risk control. Accordingly, such issues as design of the product structure, risk control and liquidity management remain extremely important.

Success conditions

The asset securitisation technique, together with the liquidity offered by the transfer market, are the preconditions for the success of the dual SPV. Based on our experience in the asset structure financing field, regular privately offered products have a liquidity problem as compared to asset securitisation products, thereby resulting in a high liquidity premium on the products and product costs remaining high, all of which increase the difficulty of selling such privately offered products. In contrast, asset securitisation, after converting assets that vary individually and the liquidity of which is weak into standard assets with good liquidity, realises the liquidity of the units, increasing the attractiveness of the product to a certain extent.

The appearance of the dual SPV structure gives investors a greater choice of investment products on the transfer markets. In future transfer markets, it will be possible to pledge and buy back securities brokerage pooled units and make transfer markets more active through the introduction of market makers, thereby realising the capital intermediary function of securities brokerages.

Policy direction

From the current regulatory policy direction perspective, the appearance of the dual SPV in asset management by securities companies will be the third model of asset securitisation, following on the heels of trusts and dedicated asset management plans. Compared to it, trust plans cannot offer the convenience of listing and trading; and compared to securities brokerage pooled plans, the dual SPV structure can, by way of the fund subsidiary dedicated plan, invest much more widely.