New frontiers

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As Chinese financial markets become more sophisticated, companies are eyeing new possibilities to unlock value, and intangible assets hold great promise, writes Sophia Luo

China restarted its asset-backed securitisation (ABS) business back in 2012, but in recent years, the rapid emergence of novel financial products – such as securitisation of data assets, green assets and intellectual property (IP) assets – is streaming into parallel with China’s development agenda and aiming to solve financing problems in these particular fields. All this brings fresh new opportunities and challenges to the market, says Wang Lihong, Beijing-based senior partner of Dentons’ Banking and Finance Practice Group.

Data securitisation

Li Mingyue, a partner from Tian Yuan Law Firm’s Beijing office, says the importance of data, including the securitisation of data assets, has unquestionably been lifted to a national level. On 1 September 2021, the Data Security Law entered into force, which reconfirms the significance that policymakers have attached to the ecological construction of data, and Li says there is little doubt that it will intensify interest in data asset transactions, including securitisation.

Matthew Ching, a partner from Jingtian & Gongcheng’s Shanghai office, says the corresponding receivables of auto loans, mortgages, student loans, credit card debt and asset-backed commercial paper (ABCP) in the US ABS market, for instance, are all dispersed debts with a relatively long track record, and have had “comparatively stable, regular statistical characteristics”. They all fall into the typical category of data assets.

The application of blockchain technology in the field of IP rights, and the use of technologies including big data and the internet of things (IoT) to track the “logistics, information flow and cash flow” of real estate and infrastructure projects could also fall under this category.

“The three major types of asset-backed securities − credit assets, assets based on the right to yields and real estate assets − could all be mapped to data assets, and by means of embedded technologies such as blockchain and artificial intelligence, the share-based transactions and turnover could be carried on in a more efficient manner,” says Ching.

“In the future, the data asset has all the elements required to become the main category of fundamental asset. It will connect multiple types of fundamental assets based on previous standards for further combination and optimisation.”

Li notes that in current business scenarios, the role that data assets could play is still limited to being tool-based, while the essence of the securitisation of data assets lies in the securitisation of the asset itself, or relevant rights based on the asset, where the fundamental or underlying assets should be data assets. “Thus it can be said that so far we have not yet blazed a trail in the securitisation of data assets in any real sense,” she stresses.

Ching says this is because the characteristics of data assets such as intangibility, dependence, diversity, machinability and value volatility pose many challenges to the development of novel businesses, including the securitisation of data assets and data trusts. The primary difficulty lies in fixing a price for data assets, but there is also the thorny problem of confirming data rights.

Li says the most fundamental problem that remains to be addressed is how the underlying assets can meet the requirements of securitisation. They need to meet the legal requirement with ownership defined in clear terms, and to be able to generate independent, predictable and specifiable cash flows. Other factors include which assets can be pooled for securitisation, how the securitisation of raw data into tradable assets before the pooling can be completed, how data assets can be valued and priced, as well as how the rights of data can be confirmed and specified.

Constrained by the fact that the basic legal system involving the rights definition, protection and transaction of data assets has not yet been set up, there is no sophisticated, viable solution at the moment.

Although it will take time for ground-breaking rules and regulations to come into force, Li emphasises that the arrival of the big data era is an irreversible trend. “Both emerging companies like internet firms and traditional enterprises need to seize the momentum … to further improve their production efficiency and create more value by capitalising on production data,” she says.

Going green

As “carbon neutrality” and “carbon peak” become themes of the times, green finance has been in full swing in the field of asset securitisation in recent years.

Wayne Huang, a Hong Kong-based counsel at Linklaters, notes that since China first introduced its policy framework for green finance in 2016, green ABS has been a key driver of China’s green bond market.

As China strives to achieve its goal of having carbon dioxide emissions peak before 2030 and becoming carbon neutral by 2060, many lawyers agree that the green ABS market will continue to expand against the backdrop of further supportive market policies from the government.

However, Payne Huang, a senior partner and director at Hui Ye Law Firm in Shenzhen, says a comprehensive accounting system for green credit programs has not yet been set up, green information disclosure remains to be enhanced, green standards still need to be unified, and the green credit services system is in urgent need of improvement.

Li adds that the inadequate disclosure of information makes it difficult for investors known for their demand for green investment to have their “green” attributes identified and confirmed, which to some extent dampens investor enthusiasm.

In addition, relatively high financing costs and compliance risks, a minimum 5% risk retention requirement, as well as stricter limits on the investment scope of funds that flow back to the original owner, also lead to a lack of motivation green securitisation.

IP securitisation

“The securitisation of IP assets is a dynamic combination between a novel development model of IP rights and a financial innovation tool of asset-backed securitisation,” says Liu Borong, an equity partner at Zhong Lun Law Firm’s Beijing office. “It can not only better resolve the financing difficulty of high-tech enterprises, but also provides a new channel to invest in emerging technologies for market participants.”

Lu Jingyi, an equity partner at Zhong Lun Law Firm’s Beijing office, highlights the continuing policy support for the securitisation of IP assets. On 3 September 2021, the State Council issued the Notice of Several Measures for Advancing Reform and Innovation in relation to Facilitating Trade and Investment in Pilot Free Trade Zones, which proposes in explicit terms the pilot programmes for the securitisation of IP assets.

Payne Huang points out that all the current IP ABSs have basically adopted the model where IP assets are pledged as collateral and creditor’s rights are built up by leasing, microcredit, factoring business and the like to generate stable and specifiable cash flows. “In the future, I am looking forward to the emergence of the real IP ABS, whose underlying assets are claims on IP licensing agreements including patents,” he says.

Meanwhile, Pan Xinggao, a Beijing-based partner at Commerce & Finance Law Offices, classifies the development modes of IP rights-backed securitisation into three major types: (1) one with accounts receivable claims generated from the IP rights as the underlying assets; (2) one with the IP rights as the target for sale and leaseback transactions or a finance lease: and (3) one that bases on the right to profit from the IP as the underlying assets.

“We are eagerly anticipating that the relevant government agencies could offer policy or financing support to encourage the related bodies to make a bold trial, thus finding out the development mode that best suits China’s actual conditions and gets it off the ground,” says Pan.

Huang stresses that the securitisation of IP assets could help small and medium-sized tech firms expand their financing channels and drive financing costs down. In particular, the owner of IP assets could still retain the post-financing ownership of IP rights, and could also increase the IP portfolio quality to enhance its value.

For local governments, securitisation of IP assets helps them reap the benefits of their technology subsidies and provides a boost to their supportive policies for technology companies.

The securitisation of IP assets provides financing support for companies under their respective jurisdictions, creates a sound financial climate, and will give local governments a leg up to bring in business and investment opportunities.

However, Pan notes that how to assess the value of IP rights and define the future cash flows stands as the most thorny and significant problem that will directly affect the feasibility of making IP rights the underlying assets of ABS.