Ford test drives China's ABS via Bond Connect

The second-largest US carmaker expands its investor base by selling the first China asset-backed securities through the Bond Connect scheme.

US carmaker Ford is best known for selling Focus compact cars and Lincoln limousines. Now it's got something new to offer in China.

It has become first foreign issuer to sell asset-backed securities through the new bond trading link between Hong Kong and the mainland, raising Rmb3.46 billion ($518 million) from the sale last week.

The renminbi-denominated deal underscores the rapid acceleration of auto-loan securitisation in China, where foreign and domestic car manufacturers, including BMW China and Dengfeng Motor, sold $6.23 billion of the structured products in the first seven months, up 42% from the same period a year earlier, Wind data shows.

Bond Connect, which kicked off on July 3, is Beijing’s latest effort to open up China’s financial markets by allowing foreign investors to trade Chinese government, agency and corporate bond markets directly without the need to set up an onshore account. In the first day of trading, Agricultural Development Bank of China, a policy lender, became the first issuer to sell debt through the scheme, raising Rmb16 billion through the latest channel.

As Wesley Yang, head of financial markets at Standard Chartered China, a joint lead manager of the Ford ABS deal, put it the deal has created a new funding channel for the company and connected international investors to China’s $9 trillion interbank bond market, the world’s third-largest debt market.

“We are privileged to support Ford Automobile Finance China in arranging the first ABS in China’s interbank bond market through bond connet,” Yang said. “The transaction will promote the development of China’s asset securitisation business.”

The transaction comprises three tranches. The most senior tranche is a Rmb3.32 billion senior class-A note paying a yield of 4.65%, or 30bp over the People’s Bank of China’s one-year lending rate. Another Rmb 144 million senior class-B note pays a yield of 4.95%, or 60bp over the benchmark rate.

The subordinated Rmb304 million note, about 8% of the deal value, was held by the issuer.  Global regulators have required ABS issuers to hold at least 5% of the deal since the 2008 financial crisis. In most cases, ABS issuers hold the most subordinated tranche in order to bolster investor confidence.

According to Moody’s, the average yield on Chinese auto-loan ABS has risen to mid-5% from 3% in middle of 2016, reflecting the central bank’s moves to rein in credit growth amid concerns over property bubble.

China Merchants Securities, Bank of Communications and HSBC China were also joint lead managers of the latest Ford ABS transaction.

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