What is a Distressed Security?

Non-performing loan securitization means that the promoters of a state-owned commercial bank sell their non-performing loans with a certain liquidity and foreseeable future net cash inflows to a special purpose vehiclespecial purpose vehicle (SPV)

Non-performing loan securitization

Right!

Non-performing loan securitization means that the promoters of a state-owned commercial bank sell their non-performing loans with a certain liquidity and foreseeable future net cash inflows to a special purpose vehiclespecial purpose vehicle (SPV)

Chinese name

Non-performing loan securitization

Foreign name

unknown

Main body

Promoter of state-owned commercial bank

Object

special purpose vehides

English

NPL Securitization

Non-performing loan securitization means that the promoters of a state-owned commercial bank sell their non-performing loans with certain liquidity and foreseeable future net cash inflows, and sell them to a special purpose vehiclespecial purpose vehicle (SPV). SPV collects a large number of homogeneous loans for combination, uses these loans as collateral, issues a variety of mortgage securities, and sells and circulates in the financial market.

From an international perspective, the financial crisis caused by bad assets is catastrophic. One of the main reasons for the financial crisis in Southeast Asia is that the huge amount of bad debts formed by its financial institutions during the bubble economy blocked the normal flow of economic arteries, and the financial crisis in Southeast Asia also showed that if a country's commercial banks have a large number of bad assets The country's financial system is very fragile, and when it is affected by some external factors, a severe financial crisis may erupt. Considering the safety of the entire financial system in China, non-performing assets directly affect the survival and development of commercial banks, and must be resolved in a timely manner.

1. Our country's current problems in dealing with bank non-performing loans urgently need to introduce new methods of non-performing loan securitization.

The main approach adopted by China in dealing with banks' non-performing assets is to learn from the US experience and adopt the RTC model. From April to October 1999, four asset management companies, Cinda, Great Wall, Dongfang, and Huarong, were set up to receive the bad debts of the four big state-owned banks. In November 2000, the State Council promulgated the Regulations on Financial Asset Management Companies, which stipulates that financial asset management companies can engage in listing recommendations and bond and stock underwriting of companies within the scope of asset management, and can lease or form assets from acquired non-performing assets In other forms of transfer or reorganization, the company's equity held by it can be transferred to foreign investors in accordance with relevant state regulations, or it can be repurchased by a debt-to-equity enterprise according to law.

From the perspective of specific operations, China's asset management companies use debt to equity to deal with banks' non-performing assets. First, the government injected funds into the asset management company, and the asset management company purchased the non-performing assets of the bank at market value, face value or discount. That is to say, the bank's claims on the state-owned enterprise were transformed into the asset management company's claim on the state-owned enterprise. Secondly, the asset management company selects certain state-owned enterprises with development prospects, and converts the claims on the enterprise into equity of the enterprise. The asset management company, as a shareholder of the enterprise, participates in the major decision-making of the enterprise. Thirdly, after the operation of the state-owned enterprise improves, the asset management company can transfer the equity it holds to recover the invested capital, or to compensate the invested capital by collecting the profits of the enterprise every year.

This method of debt-to-equity swaps is, at present, conducive to alleviating the excessive debt burden of state-owned enterprises, and it is also helpful to promote modern enterprises when the state-owned enterprise property rights relationship is not clear enough and the corporate governance structure is not standardized. The establishment of the system. However, in the long run, the shortcomings of debt-to-equity swaps will inevitably be exposed. Asset management companies now run debt-to-equity swaps. The shareholding after the transfer is called "phased shareholding" in policy, but if the capital market is weak, reorganization is not in place, or institutional factors prevent the sale of shares , "Phase holding" will be converted into "permanent holding". Ten years later, by the end of the asset management company, these shares may be converted into state-owned shares of the Ministry of Finance. In this case, inflationary pressure will also be formed, because the essence is to rely on deficit finance to make up the capital of the company. In addition, we can also see that the current debt-to-equity swap actually converts lower-risk creditor's rights into equity, while higher-risk creditor's rights remain in commercial banks, which may lead to adverse selection or reduction of risk for state-owned banks. The problem of reverse elimination has resulted in an increase in the overall risk level of the bank. At present, a phenomenon that is also common across the country is that many local companies use debt-for-equity swaps as a way to get rid of their burdens and run the "indicators." After the establishment of a financial asset management company, overdue loans by banks have risen abnormally. The emergence of a reliance economy is likely to lead to a reverse rise in the country's financial risk.

2. Advantages of banks in implementing securitization of non-performing assets.

From the beginning of the 1970s to the present, asset securitization has become a new hot spot in the financial circle with its unique style in financial innovation. It has become an important financial tool and financial technology for financial institutions in many countries to conduct low-cost financing and improve asset liquidity, security and efficiency, meet the needs of institutional investors for fixed income securities investment, and promote the deepening of the capital market. The impact of commercial banks is huge and their economic significance is far-reaching.

The first is to increase asset liquidity. Through asset securitization, the transfer, isolation and centralized processing of non-performing assets will help banks adjust bad debts, increase their liquidity and improve business performance.

The second is to obtain a variety of low-cost funding sources. By transforming assets into marketable securities that are guaranteed by enhanced guarantees, insurance, etc., the bank obtains an investment-grade fund-raising method that cannot be achieved by other financing methods. From the perspective of investors, securitization enables investors who could not previously invest in mortgage loans and commercial credit to achieve the purpose of indirect investment by holding asset-backed securities. In addition, banks generally retain loans to continue services while selling assets. Rights, to obtain a certain fee income from them, these constitute an important source of bank funds and provide conditions for expanding the total amount of monetary funds of the currency multiplier, which is helpful to the development and optimization of new social resources.

The third is to effectively reduce risks. The sale of assets can release capital, and the released capital can be reinvested in other higher-yield, lower-risk weighted assets, reducing the risk exposure of the overall asset. Moreover, due to securitization, the liquidity of assets is improved, and the risk of asset prepayment is transferred to other parties. At the same time, the quality of transactions is improved through credit enhancement. This process reduces the bank's asset and liability terms and liquidity. risk.

The fourth is to improve the efficiency of capital allocation. By investing the funds obtained from the sale of assets in other assets, financial institutions can effectively disperse the non-systemic risks they face, and break the restrictions on the geographical and industry concentration of the asset portfolio, which greatly facilitates the channels for financing and contributes to the efficiency of asset allocation. optimization.

3. Securitization is a powerful supplement to debt-to-equity swaps.

Securitization and debt-to-equity swaps are two alternative methods of dealing with non-performing assets, and there are some similarities and differences in their implementation. For banks, they all need to restructure the bank's creditor's rights. The bank's book assets will be reduced and there will be losses, but non-performing assets will be reduced. For enterprises, the two have different consequences. Securitization reduces corporate debt. However, enterprises are still subject to debt constraints, and debt-to-equity swaps have completely resolved corporate debts, and enterprises are subject to equity constraints; for the government, securitization methods have not paid much for the government, received little, and have little risk. However, what the debt-to-equity swap causes the government to pay is the loss of its creditor's right to the enterprise, and what it gains is the equity of the enterprise, which makes the government bear greater risks.

Therefore, the two methods of debt-to-equity swap and securitization have their own characteristics when dealing with non-performing assets. Under the circumstances that the operating mechanism of the enterprise is not perfect and the government's funds to resolve the bad assets of the bank are not sufficient, etc., the debt-to-equity swap cannot be processed and the effectiveness of the assets will be affected, and supplementary coordination in other ways is required. Asset securitization is exactly An effective supplementary method, therefore, it is necessary to carry out bank non-performing asset securitization.

Securitization refers to the process of issuing funds that can be sold and circulated in the financial market by using assets that are illiquid but have stable cash flow as a collateral to finance funds. Securitization business emerged in the United States in the 1970s, and gained rapid development in the European market in the 1980s, and began to enter the Asian market in the 1990s. From international experience, assets that can be securitized are those with stable cash flows. The asset we are studying for securitization is a non-performing loan received by an asset management company from a commercial bank. Therefore, the specific operation of securitization needs to modify the internationally standardized operating procedures. Specifically, it is to expand the securities issued during securitization from pure bonds to both bonds and stocks, and to increase the credit enhancement of non-performing loans with unsteady cash flows. This may be securitization. Reflected Chinese characteristics.

According to the different types of securities issued by securitization, we can design different securitization operation plans. If the securities issued in the securitization are stocks, we call this type of plan an equity plan; if the securities issued are bonds, we call this type of plan a debt plan. At the same time, under these two general plans, we can also design corresponding sub-plans based on different forms of debt restructuring.

Let's examine the equity plan first.

The design of the equity plan is related to debt restructuring between debt companies and banks. The so-called debt restructuring refers to the transformation of the debt relationship in the direction of the debtor in favor of the debtor through negotiation, administrative arbitration, and court judgment in accordance with relevant laws and regulations in the event that the debtor has difficulty repaying the debt. The specific operation of bank-enterprise debt reorganization related to securitization can be divided into three categories: one is to settle debts, that is, debt companies transfer their assets to creditor banks to pay off debts; the second is to convert debts into equity, which is essentially debt Capital increase by enterprises; the third type is to settle debts by equity, that is, the debt enterprise uses the equity of other companies it owns to pay off debts to creditor banks.

For the debt-to-equity type, the operation plan of the asset management company can be designed as follows: First, a commercial bank with bad corporate debts of the company sells the bad debts to the asset management company, and the asset management company accepts the debt enterprise to fund the debt scheme. After obtaining the debt-recovery assets, the asset management company uses these asset portfolios (or asset pools) as the promoter's capital, and cooperates with high-tech enterprises (or absorbs high-tech achievements to technical human shares) to establish a joint-stock company and publicly list. After a certain period of operation of the listed company, the asset management company transfers the equity, and the transfer proceeds are used as consideration funds paid to the commercial bank. This plan is called equity operation plan one.

For the debt-to-equity swap type, the operation plan of the asset management company is as follows: First, the commercial bank will transfer its debt to the debt management company to the asset management company, and the asset management company will convert the debt to equity (non-shareholding company) according to certain principles. Shareholding transformation is required). After the debt-to-equity swap, the asset management company actually became the largest shareholder of the debt-to-equity swap company, so it was possible to restructure the company's assets. After the conditions are mature, the asset management company will transfer its equity, and the transfer income will become the source of funds for the asset management company to accept the bad debts. This plan is called equity operation plan two.

The principle is the same for debt-servicing with equity. The difference is that it is difficult for an asset management company to become a holding unit. It is difficult for the asset management company to manage or restructure assets.

The basic idea of the equity plan is to make full use of the feature that equity financing does not require repayment to realize the securitization of non-performing loans. Its advantages are that it avoids the requirement of stable cash flow for securitized assets in the international practice, so that the scope of non-performing loan securitization can be implemented widely, and the social and political risks caused by the issue of bonds cannot be repaid on time. The disadvantages are high public listing requirements or difficult equity transfer. Due to the current approval system for public listing, how to make established joint-stock companies meet the listing standards and list is a key issue for asset management companies. It is recommended that the state grant certain preferential policies to asset management companies in order to support the securitization of non-performing loans. At present, the transfer of Chinese legal person stocks is mainly through mergers. Therefore, how to restructure debt companies to meet the requirements of mergers and acquisitions is another key issue facing asset management companies. The equity plan is a means for asset management companies to run non-performing loans, not an end. Its purpose is to reduce the financial burden of debt companies through equity solutions, facilitate asset management companies to restructure debt companies, improve the business operations of debt companies, ensure the safety and appreciation of assets of asset management companies, and ultimately realize the transfer and realization of equity. To pay for the asset management company's acquisition (or acceptance) of funds required by commercial banks for non-performing loans.

Consider the debt scheme again.

The debt scheme is a pure securitization financing. The idea is as follows: the first is to realize the transfer of creditor's rights, that is, the asset management company purchases different non-performing loan portfolios from commercial banks at a certain discount rate; second, the asset management company classifies and combines the different types of loans to form a certain cash flow Pool of non-performing loans; again, the asset management company relies on this loan pool to issue tradable bonds; finally, the proceeds of the bonds raised by the asset management company are used to repay the funds for the acquisition of non-performing loans and to pay the principal and interest of the bonds . This plan is designated as the first credit operation plan.

This debt scheme is operated in accordance with the basic model of international securitization operations, but it has high requirements on the quality of assets, such as the need for assets to generate stable cash flows in the future. This is because the timely payment of bonds is also determined by the cash flow characteristics of the assets. Therefore, for non-performing loans that can generate a certain but not stable cash flow, we can design a reasonable structure for credit enhancement to increase the stability of cash flow and investor confidence. This is the non-performing loan securitization claims The key to success.

If this solution is derived again, a more complicated debt solution can be obtained. That is, after the asset management company acquires non-performing loans, the creditor's rights are converted into equity, and then tradable bonds are issued based on the equity; or if the asset management company itself accepts equity, it can also operate in this mode. This plan is designated as the second option operation plan.