Alibaba and Orient Securities’ asset management arm received approval from the China Securities Regulatory Commission (CSRC) to sell products backed by loans from Alibaba’s lending arm Aliloan. The move will give Chinese investors a first-time opportunity to get exposure to the country’s micro-borrowers.
The product, sold through the Orient-Alibaba Capital Management Plan, will be issued via 10 tranches at irregular intervals over three years, the Shenzhen Stock Exchange (SZSE) announced on July 8. The quota of each tranche will range from Rmb200 million Rmb500 million (US$32.6 million-US$81.51 million).
The proceeds will be used to finance new loans. The SZSE did not disclose when Alibaba’s first tranche issue would be.
“It’s a good tool that isn’t like the risky pooled securities that contained mortgage-backed loans with an unknown credit quality. Investors will know specifically what kinds of assets are in the pool – it’s something used a lot in the West that gives capital to the borrowers who need it,” said the Hong Kong-based head of investment strategy at a Chinese securities firm. “It’s part of the positive opening up of the capital markets. New products with strong transparency with varying risk profiles are part of the new administration’s reform.”
Aliloan was launched in 2007 to extend loans to micro- and small-sized companies looking to buy products on Alibaba’s business-to-business websites. It remains one of the few lending tools offered by private companies in China.
While loan-based securitisation is common in more mature markets, Alibaba’s products will be the first asset-backed securities linked to micro-borrowers in China.
This poses both opportunities and risks. Though investors will get exposure to these creditors – and thus receive higher yields - their investments are not necessarily guaranteed by Alibaba.
“This is a new space for issuers and investors, and regulators need to implement rules on how the products are repaid according to cash flows receivable,” said a China credit analyst, noting that if Aliloan borrowers default on their payments, not all the capital may be repaid.
“If Alibaba went bankrupt, it’s a good thing that investors will be repaid by the money from the receivables – it’s money from someone else and not from Alibaba. But then, if the ultimate cash provider isn’t able to repay, it’s not necessarily Alibaba’s prerogative to pay all the investors back,” he added, noting that investors into a senior tranche would likely receive principal repayments while investors into a subordinated tranche may not.
Chinese regulators are aware of the dangers but also see value in launching the product. For them, Alibaba’s loan securitisation will raise capital for micro and small businesses, which is among the State Council’s top priorities. This segment is often overlooked by China’s banking sector and capital markets, which cater to larger and state-backed companies.
“The debut of the product indicates the emergence of an additional new type of asset among the asset securitisation products series,” wrote the SZSE. “‘Alibaba No.1-10 Special Asset Management Plan’, being the first trial of small loan type of asset securitisation, is both significant and risky. SZSE will further strengthen the continuing follow-up, risk evaluation and risk resolving mechanism [of the product].”
However, analysts expect Alibaba’s products to carry minimal risk. While Aliloan do not publish its financial results, documents seen by Chinese news site Caixin.com in March show that the company’s non-performing loans (NPL) - including loans in the categories of substandard, doubtful and loss - accounted for just 0.2% of all those outstanding.
Aliloan had lent more than Rmb26 billion to 129,000 small and family-owned businesses between April 2010 and July 1, 2012. The low NPL rate was attributed to borrowers’ fears that missing payments would impact their ability to do business on Alibaba’s websites.
“Investors will be pretty interested in this deal. It’s fresh for the market and it’s from Alibaba, which has a very strong balance sheet and is linking its accounts receivable to an asset backed security –repayments will surely be backed by Alibaba,” said the head of investment strategy. “Not everyone will default in the Aliloan pool, and as long as the percentage of defaults is smaller than the full amount then it’ll be all right.”
Furthermore, regulators are keen to make the burgeoning asset-backed securities market a success, and may compel Alibaba and other future issuers to structure their products with more favourable terms for the investor.
Either Alibaba will set up a trust to oversee a pool of capital to repay investors if Aliloan borrowers come up short, or Alibaba will guarantee part or all of the products. This will also help generate a more favourable credit standing and help to improve pricing, predict analysts.
Other issuers will likely follow Alibaba to launch similar products – not necessarily backed by loans, but accounts receivable. These may include China’s auto and internet companies, manufacturers and technology providers. Companies from industries that are particularly supported by the State Council, such as science and technology, will be especially encouraged.
“You see companies like General Motors doing these sorts of deals and it’s a good funding channel,” said the credit analyst. “This is another example of China’s capital markets becoming more mature and following its Western counterparts to create efficiency in the market…Other companies can expect to get this opportunity, and smaller companies will end getting a lower cost funding because a ‘AAA’ company like Alibaba will raise on their behalf. These micro companies otherwise wouldn’t have that chance.”