The Chinese real estate sector is going through tough times as many developers are facing financial troubles, and are unable to pay their suppliers or debt holders. To help deal with the issue, Chinese regulators have reopened an onshore funding channel for the developers that can help the companies pay their suppliers.
Known as Supply Chain Asset-Backed Securities (ABS), these instruments are usually used by real estate firms like Country Garden Holdings and China Evergrande to raise yuan-denominated debt.
“In a typical supply-chain securitization, a factoring company bundles the suppliers’ receivables into securities that are sold to investors in China. The transaction is initiated by a developer, and the cash raised from the bond sale helps the factoring company buy the supplier receivables. When the developer pays its bills, that money goes to holders of the bonds,” the Wall Street Journal (WSJ) reported.
Last year, property firms alone issued $38.6 billion worth of supply chain ABS, a large spike from $12.4 billion in the previous year. At the start of 2021, regulators begun imposing restrictions on the issuance of such securities as part of an attempt to control the leverage used by developers.
Considering the ongoing pressure and liquidity challenges facing real estate companies, Beijing apparently decided to loosen up these restrictions. As such, Chinese developers can now start issuing supply chain ABS bonds once more. However, the funds raised from these instruments can only be used to refinance a company’s debts.
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The issuance of supply chain ABS is moving forward at a slower pace at present, which isn’t surprising given the liquidity troubles facing the real estate industry and the potential of defaults. Only stronger developers are able to sell these bonds.
In the current fourth quarter, only $1 billion worth of supply chain ABS has been sold by property developers, which is far less than the $10 billion worth of these securities sold in the fourth quarter of 2020. Most of the sellers have been state-backed entities.
For suppliers, the supply chain ABS helps them get paid faster. For the issuing real estate firms, the instrument lowers short-term liabilities they need to report. Moreover, developers can also satisfy one of Beijing’s “three red lines” policies imposed on the industry—the rule to maintain a cash to short-term borrowing ratio of at least one.
For an investor, the supply chain ABS is a riskier bet since the underlying payment for each deal comes from a single real estate company. As such, if this developer suffers losses and is unable to honor payments, investors will lose all their invested funds.
Country Garden, China’s top property developer, recently revealed plans to apply for issuing supply chain ABS soon. In a statement uploaded to the company’s official WeChat account, Country Garden said that supply chain ABS can support suppliers’ financing and ease the difficulties faced by small and medium firms. The company also pledged to control its risks through careful operations.
“Restrictions on domestic real estate bond financing have eased, and the amount of bond issuance in November is about three times that of October,” analysts at CICC said in a note. Other developers like Huafa Industrial and Greentown China have received feedback from regulators regarding their plans to issue ABS worth almost 16 billion yuan (US$2.51 billion). China Vanke is planning on issuing supply chain ABS of around 777 million yuan (US$122 million).
