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ABA
January 24, 2020  

China Bond-Rating Initiatives Back on Track

President Trump’s trade deal with China has paved the way for Moody’s and Fitch to set up shop in the nation.

Both agencies had applied to the Bank of China and National Association of Financial Market Institutional Investors for permission to grade securities that issuers in China distribute at home. But the efforts stalled as the Chinese and U.S. governments battled over tariffs and other trade policies last year.

Now comes word that a partial truce, signed on Jan. 15, contained a provision for China to expedite the applications from Moody’s and Fitch. “China just stopped it cold last summer,” one source said. “The Trump Administration made sure their approval was part of the trade deal, and reps from both rating agencies were at the White House when the deal was announced.”

S&P currently is the only non-China rating agency approved to grade securities issued and sold in the country, having received the go-ahead from Bank of China and Nafmii a year ago. While others including Moody’s and Fitch have been able to grade deals from China in certain cases, those instances typically were limited to offerings in which the issuers approached the firms with offerings intended mainly for foreign distribution.

What’s more, those evaluations typically were handled by staff in the U.S. or Hong Kong. And a far broader universe of credit-rating opportunities in China remained off limits.

In the meantime, Moody’s and Fitch sought to further dip their toes into the waters. Fitch, for example, set up an operation called Fitch (China) Bohua in 2018 in anticipation of gaining the same approvals as S&P — a step that would grant it far more leeway to directly solicit assignments and station employees in China.

The efforts reflect expectations of long-term growth in the volume of securitizations and other credit-product transactions from China. In addition to getting a piece of that business, the rating firms see their participation as helping to fuel expansion by making deals more attractive to investors in the U.S. and elsewhere. Indeed, Structured Finance Association chief executive Michael Bright said grades from the three largest agencies would help ease concerns about the quality of regulatory oversight in China.

Securitizations from the country so far have been heavy on deals backed by auto loans and corporate loans. There also has been a push to issue more mortgage bonds, which could gain momentum amid the proposed formation of a government agency that would originate and securitize home loans.

Bright’s experience as the former interim head of Ginnie Mae and his work at the SFA have added to his involvement in the modernization of China’s securitization industry. In October, for example, he met with regulators in Beijing to share his insights. “They are looking to get foreign capital to invest in their securities and are interested in the idea of building a Ginnie Mae structure,” he said.

Bright will return to Beijing as a keynote speaker at Information Management Network’s “Global Investors’ Conference on Securitization in China,” which takes place at the Kerry Hotel on March 27-28.

According to S&P, securitization volume in China totaled $334 billion in 2019. While that marked a 16% jump from 2018, the expectation is that new-deal activity will flatten in 2020 before picking up again.