Legal points for asset securitisation of enterprise financing claims

By Matthew Ching and Sun Yang, Jingtian & Gongcheng
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Asset securitisation of enterprise financing claims (enterprise financing claim ABS) is an innovative asset-backed securities (ABS) product appearing in recent years, which refers to the asset securitisation business carried out by securities companies and subsidiaries of fund management companies as ABS managers, banks or non-bank financial institutions as the subject, and trust beneficiary rights or financial claims under asset management contracts, such as trust contracts, as the basic assets or source of cash flow of basic assets.

秦茂宪, Matthew Ching, Partner, Jingtian & Gongcheng
Matthew Ching
Partner
Jingtian & Gongcheng

Since the promulgation of the Guiding Opinions on Standardising Asset Management Business of Financial Institutions, the regulatory rules for reducing the scale of non-standardised claims have been introduced one after another, and Enterprise Financing Claim ABS has become an important channel for financial institutions to realise “transformation from non-standard to standard”.

Basic assets and underlying assets

The basic assets of enterprise financing claim ABS can be claims, and can also be certifications of trust receipt. If a certification of trust receipt such as a trust beneficiary right is the basic asset, there should be clear underlying assets, and the underlying assets should be claims.

Access requirements. With a clear legal relationship and chain, basic assets are free of multi-layer nesting. The formation of basic assets and underlying assets should be in compliance with laws, regulations and the regulatory requirements of relevant competent departments, and the investment of funds should not violate national industrial policies and regulatory requirements.

Degree of dispersion. The basic assets or underlying assets of enterprise financing claim ABS should have a certain degree of dispersion, and should include at least 10 debtors that are not related to each other, and the proportion of assets put into the pool by a single debtor should not exceed 50%. If the original interest holder has good credit status, and has set effective risk mitigation measures, or the asset pool is of good quality, the above-mentioned dispersion requirements may be exempted.

Industry restrictions. According to the regulatory requirements, in enterprise financing claim ABS, the proportion of pooled amount of a single real estate debtor should not exceed 15%, the proportion of pooled amount of a single real estate debtor and its affiliates should not exceed 20%, and the proportion of total pooled amount of real estate debtors should not exceed 50%.

Special requirements of trust beneficiary rights as basic assets. All trust beneficiary rights of the same trust plan should be put into the pool. The underlying assets should have clear underlying debtors, which should not change without the consent of the ABS plan, and the repayment amount and time of the underlying claims should be clearly provided. The distribution frequency, sequence and process of the trust plan corresponding to the pooled trust beneficiary right must be clear, the underlying cashflow source corresponding to the pooled trust beneficiary right should be clear, and the cashflow should be predictable.

Requirements for pooling in combination. Trust beneficiary rights and claims that meet the above-mentioned requirements can be combined into the pool.

Others should refer to, and are governed by, the relevant requirements for basic assets in the Guidelines for Confirmation of Listing Conditions of Enterprise Accounts Receivable Asset-backed Securities. The requirements include, but are not limited to, that: The claims involved in the basic assets should be specific, and the payment amount and time should be clear; the original interest holders should legally own the basic assets; the trading contract of the basic assets and the underlying assets should be legal and valid; and the transaction consideration should be fair. If the basic assets are acquired from a third party, the original interest holder should have paid the transfer consideration, and the transfer consideration should be fair.

孙旸, Sun Yang, Associate, Jingtian & Gongcheng
Sun Yang
Associate
Jingtian & Gongcheng

Other requirements

Original interest holders. The original interest holders should have good credit standing and sound internal control systems, and have committed no major breach of contract, false information disclosure, or other major violations of laws and regulations in the past three years. The securitisation business carried out by the original interest holders with enterprise financing claims as the basic assets or the underlying assets should be legal and compliant, with no violation of the regulatory requirements of the competent authorities. It should be noted that generally the asset service institution of the ABS should be the original interest holder according to the regulatory requirements.

Credit enhancement measures. At the ABS level, stratification by priority, excess spread, replacement of risk assets and redemption of non-conforming assets are generally arranged as credit enhancement measures. Among them, the original interest holders and their affiliates should subscribe for a certain proportion of junior securities at the risk retention standard of bank credit asset securitisation. However, if the original interest holder has good credit status, it may be exempted from the risk retention requirement.

Cashflow collection. If the basic assets are claims, in principle, the cashflow of the basic assets should be directly returned by the debtor to the ABS account. If the original interest holders are asset management plans such as trust plans, after transferring the underlying claims to the ABS, if the cashflow of basic assets still flows through the asset management plan account, in principle, the underlying claims should be the only property held by the asset management plan, and there should not be the possibility that the recovered fund of the underlying claims is confused with other funds when flowing into the asset management plan account.

Shelf arrangement. The shelf project should meet the requirements of the stock exchange on the instalment issuance of ABS, and should submit the first asset pool when applying for shelf issuance. Intermediaries such as ABS managers should complete due diligence on the first asset pool.

Other important obligations of participants. All participants in enterprise financing claim ABS should refer to and follow the relevant requirements on the arrangement of obligations during the existing period in the Guidelines for Information Disclosure of Enterprise Receivables Asset-backed Securities and the Guidelines for Credit Risk Management during the Existing Period of Asset-backed Securities (Trial), and fulfill their obligations to continually monitor the operation of the underlying assets during the existing period.

Matthew Ching is a partner and Sun Yang is an associate at Jingtian & Gongcheng

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