Case study: China’s first batch of urban rail ABS projects

By Ye Fei and Xie Yuhao, Jincheng Tongda & Neal

Urban rail transit has long been encouraged and supported by national policy, having been specifically mentioned in the 10th, 13th and 14th five-year plans due to its being a form of large-capacity clean transport and one of the most important elements of citywide infrastructure in boosting investment, adjusting structure and stabilising growth of the national economy.

Senior Partner
Jincheng Tongda & Neal


Urban rail transit (URT) of a quasi-commonwealth nature features large-scale construction and high operating and finance costs. As revenue from fares can hardly cover their costs, URT projects usually need government subsidies. Therefore, how to diversify financing sources and revenue streams to address project funding has become a top priority in ensuring sustainable URT development.

Local government budgets have long been a significant source of funding for URT projects. Generally, projects follow the “government capital + loans” financial model. Specifically, local public finance provides project capital, while the remaining funding shortfall is filled by the project owner/investor with bank loans, bonds, asset-backed securities (ABS), trust plans, etc.

In 2015, the General Office of the State Council and the National Development and Reform Commission (NDRC) issued policies and rules to channel private-sector capital into public-service projects. Against this backdrop, Beijing Subway Line 4 took the lead in applying the so-called PPP (public-private partnership) model. This marked a meaningful move towards looking for ways to leverage private capital and diversifying funding sources for public projects. Innovative funding models for URT projects have been emerging ever since.

Senior Partner
Jincheng Tongda & Neal


China’s ABS market has become increasingly mature in recent years as policies and regulations gradually improve. A variety of innovative trading products and structures have sprung up, and URT projects have been active in trials and explorations of the ABS model.

The core of an ABS-funded project is that underlying assets can generate stable and foreseeable cash flows. Generally speaking, passenger fares meet that basic condition. For example, Guangzhou Metro, Beijing Subway and some other ABS projects took the subway passenger fare revenues (which in this article also means the right to collect fares) as underlying assets.

In reality, however, many URT projects already provided the right to collect fares and physical assets pledged as credit enhancements for pre-financing. Therefore, the right to collect fares or physical assets could not be separately released in later stages to serve as underlying assets for ABS projects.

In the context that ABS underlying assets are subject to negative list management and that the ABS projects backed by future operating revenues are subject to stricter supervision, it is vital that financial markets address how to abandon fare revenue as underlying assets for URT projects, how to select eligible underlying assets and how to identify sources of stable cash flows.

By developing auxiliary properties and underground spaces, URT projects have a growing pool of resources to tap. The Regulations on Development and Utilisation of Urban Underground Spaces provide that “urban underground projects shall be managed by the project owner or user that develops or uses such projects”, and “the investor/owner of an underground project is allowed to operate for its own account, or transfer or lease the underground project it has invested in, developed and built in accordance with the law”.

Some cities have granted the URT investors/owners the right to operate and manage auxiliary properties and underground spaces of subways. This offers a new approach to ABS for URT projects, especially subway projects.

Nanjing Metro, for example, has pledged the fare revenues from its completed and ongoing metro lines as collateral to secure consortium loans for projects. The debt tenor is long and the collateral cannot be released in the short run.

The solution was found in leveraging the rental revenue from above-ground superstructures and underground spaces as underlying assets and main sources of repayment. Through a novel mezzanine trust design, the underlying assets able to generate stable cash flows were locked in using a licensed operation and management model. The authenticity and legality of the underlying assets were further verified and the monopoly and exclusive rights to underlying cash flows were set out.

The ownership of interests in underground spaces was also properly addressed with dozens of legal instruments that defined in detail the legal relationship between, and rights and obligations of, the original beneficial owner and the plan manager, the plan manager and the beneficiary, and the original beneficial owner and the beneficiary. This solution helped Nanjing Metro raise RMB1 billion (USD156 million), opening up a new channel for ABS financing for similar projects across the country.

Ye Fei is a senior partner at Jincheng Tongda & Neal. He can be contacted on +86 25 8772 9898 or by email at

Xie Yuhao is a senior partner at Jincheng Tongda & Neal. He can be contacted on +86 150 5181 3443 or by email at