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China auto ABS motors ahead, despite bond slowdown

* Car-loan securitisations buck downbeat trend for corporate credit

By Ina Zhou

HONG KONG, May 29 (IFR) - Auto loan securitisations have continued to thrive this year in China, in contrast with the sharp decline in vanilla bond sales.

Last week, SAIC-GMAC Automotive Finance completed a 4 billion yuan ($580 million) print of asset-backed securities in the interbank bond market, bringing total auto ABS issues year to date to 12, up from seven in the same period last year.

New issue volumes almost tripled to 42 billion yuan from 14.9 billion yuan in the first five months of 2016, according to data provider Wind.

Conversely, new issues of vanilla corporate bonds slumped 54 percent year on year to 1.54 trillion yuan in January-April, according to Wind, as many issuers postponed or cancelled deals amid an onshore liquidity crunch.

The expanding auto loan ABS market is benefiting from a growing need for funds in the captive financing segment, as well as the ability of originators to pass on higher funding costs to their customers, bankers and analysts say.

"Auto ABS issuance this year will at least beat the level of last year. We have seen issuers like Mercedes-Benz that want to do larger deals as the industry is expanding," said a Shanghai-based banker covering structured finance. HIGHER YIELDS SAIC-GMAC, a joint venture between General Motors and state-owned SAIC Motor, is the first to have closed two auto ABS so far this year, albeit at a high price.

In its second trade last week, SAIC-GMAC priced 1.59 billion yuan of Class A1 fixed-rate notes, scheduled to mature on January 26 2018, at par to yield 4.95 percent. This was 75 basis points more than the yield on a tranche with the same rating and similar tenor in SAIC-GMAC's previous ABS launched in early March.

The rise in funding costs is even more striking relative to SAIC-GMAC's June 2016 ABS, which offered only 3.20 percent on a similar tranche.

"Although the market is getting more difficult, the originator is still able to absorb the rising funding costs," said a banker familiar with the deal, noting that the weighted average interest rate was 11.2 percent on the 4 billion yuan underlying auto loans for SAIC-GMAC's second offering.

"With this kind of interest income from borrowers, the issuer can comfortably cover this level of ABS funding cost, as well as underwriting fees."

Mindful of investors' preference for different maturities, SAIC-GMAC offered more tranches with its latest ABS than the one in March, which consisted of only one Class A tranche and an unrated subordinated tranche.

In the latest trade, 1.88 billion yuan of Class A2 floating-rate notes, scheduled to mature on January 26 2019, were priced at 75bp over the policy rate on one-year loans, for an initial yield of 5.10 percent.

Meanwhile, Class B floaters of 310 million yuan, with a scheduled maturity of May 26 2019, were printed at 125bp over the policy rate on one-year loans, indicating an initial yield of 5.60 percent.

A 220 million yuan subordinated tranche was unrated.

Citic Securities was lead underwriter and bookrunner on the offering, along with Bank of China, Bank of Nanjing and Standard Chartered (China) as joint lead underwriters. Mizuho Bank China and Standard Chartered (China) were financial advisers. YOUNGER BUYERS The flurry of auto ABS deals underlines the rapid growth in car loans, at a time when borrowing directly from Chinese banks has become difficult.

In the first quarter, auto sales grew 7 percent, the strongest January-March period since 2014, according to China's car-makers association.

With a demographic shift towards younger buyers, the proportion of passenger cars purchased on credit is expected to continue rising in 2017.

According to Fitch, the weighted-average age of individual borrowers in the underlying pools of auto ABS transactions has fallen in recent years.

"For example, the pools of SAIC-GMAC Finance are four years younger on average in 2016 (32.9 years), compared with 2012 (36.7 years)," Fitch said in a report on China auto loan ABS.

At the same time, banks have been ordered to restrict loans to auto-financing firms since the start of this year amid China's broader attempt to rein in excessive leverage. SLOWING MOMENTUM Despite the solid momentum of auto-loan securitisations, bankers say they are not immune to the overall decline in demand. In particular, big Chinese banks have scaled back bond investments in response to growing regulatory scrutiny of their wealth-management products and other off-balance sheet liabilities.

"Last year, it was common for large Chinese banks to put in a single order of 700 million yuan or 800 million yuan for an auto ABS, but, this year, their ticket sizes were much smaller and some even walked away from ABS deals," said a syndicate banker with a foreign bank.

Bankers say foreign investors' participation in auto ABS has never been significant. Besides some locally incorporated foreign banks, last year only one auto ABS deal attracted an offshore investor, who placed an order through the RQFII scheme.

"Rising coupon rates are likely to hinder the issuance momentum in the second half of 2017," said Grace Li, director of structured finance at Fitch.

She forecasts a 20-30 percent year-on-year rise in auto ABS issuance volume this year in China, which implies a noticeable slowdown from the first five months.

"We keep our projection of 20-30 percent at the moment, taking into account the higher issuance volume/number in H1 2017 and the possible slowdown in H2 2017," Li told IFR. (Reporting by Ina Zhou; Editing by Vincent Baby and Daniel Stanton)

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