In recent years, Asset-Backed Securities (ABSs) have become one of the most dynamic yet mature financing instruments in the capital markets. While largely still unfamiliar to the general public in mainland China, it has rapidly become a critical, technical mechanism for the country to expand its financial reform and revitalize the real economy. There is a common saying that “If you have a particularly good cash flow, it can be securitized”, but many people do not sufficiently understand asset securitization. Simply put, asset securitization refers to the issuance of asset-backed securities where the cash flow generated by the underlying assets is structured to allow for repayments or credit enhancement. It refers to a financing approach based on asset credit that is supported by a specific asset portfolio or specific cash flow and the issuance of marketable securities.
As the professional providers of legal services in ABS transactions, lawyers provide comprehensive, end-to-end legal services for securities’ companies, asset management companies, commercial banks, trust companies, investment funds and their subsidiaries, and other financial institutions. Their legal services generally fall into two main stages: model declaration and later-stage issuance, spanning the entire process of ABS transactions, including legal due diligence, transaction structure, drafting, review and revision of transaction documentation, regulatory assistance and operational risk controls, as well as due diligence and legal advisory prior to issuance.
As some companies and executives may find these financial instruments overtly sophisticated or complex, they may need to engage experienced industry practitioners. This interview will highlight the specific experience and capabilities of Jingtian & Gongcheng’s asset securitization practice.
A Focus on Strategy and Market Leadership
Jingtian & Gongcheng is the first law firm in China to provide legal services in the field of asset securitization. Since 2003, the firm has been committed to developing the Chinese asset securitization market and has consequently assumed a leading role with in the domestic market. After years of development, and in collaboration with many partners, Jingtian & Gongcheng’s ABS team developed a strategic plan, mutual technical support and the experience overall promotion of legal services across all areas of securitization. The team is innovative, familiar with regulatory policies and highly experienced.
Jingtian & Gongcheng is well-known for its innovation in the capital markets. In addition, its ABS team has also accomplished many, “first-of-its kind” projects based on their practical expertise and innovative approach.
The “Special Program of Financial Assets Support for the Intellectual Property Supply Chain of Qiyi Century” undertaken by Qiyi’s Partner Maoxian Qin and his team in 2018 is an example. This program was the first securitization product backed by intellectual property assets in China, the underlying assets of which were new-type underlying assets. These were formed on the basis of intellectual property trade, requiring highly on legal due diligence and innovation, which explored a new financing option for the intellectual property sector in China. It generated a great deal of attention from the media, the industry and the country and created a huge impact. It has been included as one of the first institutional innovation cases within the Hainan Pilot Free Trade Zone.
Jingtian & Gongcheng’s other innovative projects in the ABS sector include: the “Asset-backed Special Plan for the Supply Chain of China Communications Construction” in 2019, which utilized the first ABS of agency model + multi-core enterprise supply chain in China; the “Asset-backed Special Plan for China Construction Factoring-Haitong Securities-China Construction Second Engineering Supply Chain”, China’s first supply-chain financing ABS of central enterprise agency model; and the “Asset-backed Special Plan for Finance 1-10 Assets Support of China Securities-Dingcheng Factoring Supply Chain”, the new-economy supply-chain ABS of the largest issuance scale.
How does one achieve innovation? According to Mr. Qin, you have to “think like an investment bank”. As an unusual financing instrument, ABSs, though increasingly maturing in China, are still new to most business clients. The fully engaged and proactive ABS team of Jingtian & Gongcheng have adopted the highly sensitive and insightful mindset of the investment banks in order to carry out “investment bank-like” cooperation and tap into business opportunities of ABS financing based on the rich client resources accumulated throughout the firm’s long-term operation. They are committed to serving like accountable investment banks and providing clients with appropriate ABS financing proposals, while offering clients a comprehensive package of services that cover coordination with other intermediaries in project declaration and match-making with investors.
In addition to the above mentioned, Mr. Qin and his team also assisted clients in accomplishing the biggest ever CMBS in China; the issuance of the Haitong-Huatai-Sinar Mas Plaza Asset-backed Special Plan which won the honor of, “CMBS/CMBN of the Year”, in 2019, “Advancement Awards” of Real Estate Assets Securitization for the program and “Legal Adviser of the Year” for Jingtian & Gongcheng.
A Circumspect Approach to Innovation
Jingtian & Gongcheng has participated in a wide range of innovative projects and counts itself fortunate to have established its level of success. Reflecting on its historic successes, Beijing Partner Lina Zhao believes that there are no shortcuts to success, and what they have achieved is a result of the concerted effort of Jingtian & Gongcheng’s ABS team which includes:
Firstly, a deeper working knowledge of the relevant regulatory rules and related issues, a fundamental understanding of their technical legal aspects and practical experience acquired on ABS transactions. Innovative projects are often based on existing products and rules. Because of this, the team members’ aggregate experience on previous projects and understanding of rules and regulations set the groundwork for further innovative projects.
Secondly, continuous attention to and learning about new sectors, new legislation and new policies. China’s financial asset management products are continuing to develop rapidly. As new types of products continue to emerge in this highly regulated field, relevant laws, regulations, and regulatory policies are frequently updated.. To ensure our clients receive high-quality legal services, the team continues to keep abreast of newly-promulgated legislation and policies, which are shared with clients expeditiously.
Thirdly, a thorough understanding of clients’ commercial needs, leveraging the law to create value. In innovative projects that lack a precedent, clients may be unable to identify legally feasible solutions, even with a comprehensive understanding of their own commercial goals. Based on the team’s long-term relationship with the client and their practical experience, they are often able to deeply and accurately understand the customer’s business needs. . On this basis, they are able to leverage their legal expertise to deliver value-added advice and recommend legal solutions to develop and optimize project plans from a risk-based perspective.
Finally, a focus on engagement, collaboration and dedication to our clients and their business needs. If we liken an innovative project to a road not taken, our clients and intermediaries are travelers on the same road, traversing the brambles and thorns together. All stakeholders have to make practical assumptions, prudent assessments and a concerted effort throughout this trip. Sometimes, they have to make repeated attempts in the face of significant obstacles, or backtrack when necessary. From launch to implementation, the natural flow of a project could include adjusting the project structure, revising transaction documents, and working diligently to meet deadlines. This often includes working late into the evening on a repeated basis. The ultimate success of a project relies heavily on the dedication, values and collaboration among all stakeholders.
In the midst of continual innovation in the financial products space, lawyers have to retain an open mind in order to embrace different perspectives and deliver innovative advice (including innovation relating to underlying assets and product structure plans). Concurrently, lawyers have to also utilize their legal knowledge and experience to strictly verify the compliance of any new advice and its practicality in order to support this advice from a legal and regulatory standpoint. Effective risk avoidance measures have to be designed to ensure that the new products can withstand scrutiny from regulatory authorities and the market overall.
Innovation and Continuous Improvement
For a long time, asset securitization has been an important force for China’s financial innovation, and it has become one of the most dynamic and mature financing tools in the capital market. How does Jingtian & Gongcheng differ from other law firms in the field of asset securitization? In the view of Guangzhou Partner Li Li, there are three main aspects:
Firstly, having an accurate understanding and knowledge of the ABS business. Essentially, asset securitization requires the placement of assets from the left side of the balance sheet into a package, which consists of an independent SPV which can then be used to issue tradable securities in equal shares. This is a financing approach based on asset credit, whose purpose, in legal terms, is to ensure the isolation of risk for this assets package. For example, if the only profitable business of a debt-ridden company is an office building, this building can be put into an SPV under these circumstances. As long as the SPV can separate the risks of this building from those in the company’s operations, the assets of the building can be used to acquire financing opportunities at costs far lower than that of the parent company. In foreign countries, ABS products are characterized as “the legal service with most involvement, in terms of financing, and the financial products with the most legal factors”. In fact, it has its own core logic and philosophy. Because of this, a good ABS lawyer must have a deep understanding of the business itself in order to give professional advice and overcome project-related problems.
Secondly, the product design is well-suited to clients’ business requirements. On many projects, Jingtian & Gongcheng’s contribution is not restricted to legal advisory services. Instead, they understand clients’ business needs on a practical level, respect their business models and combine their transaction processes with industry knowledge to help complete product design and project implementation. For example, the supply chain project of a real estate company is actually a model for the core company to construct the entire upstream supply chain ecology and a cash flow management tool for the company. The core company needs to confirm the underlying assets by issuing a payment confirmation and performing debt accession.
There are different models in practice—whether by verifying the supplier or by commitment of the factors or proposed product-side managers—may impact the accounting treatment of a company’s operating liabilities, which is precisely a determining factor for the core companies to initiate a supply-chain securitization project.
Therefore, when drafting basic confirmation documents, lawyers have to remind the companies to consult the auditors in advance for opinions and feedback on the templates of related authentic rights documents. In addition, during project declaration, in addition to drafting transaction documents and providing legal opinions on the model, more time and attention would be spent on learning about the core companies’ internal purchasing, payment and settlement systems, including the actual practice in each link of the formation of accounts payable. Models of underlying assets would be sorted out at an early stage to ensure the entry standards of underlying assets. Assistance is also provided to factors to make early assortment of assets documents listing and review standards at the assets collection and preparation stage, thereby greatly enhancing the product issuance efficiency after acquiring approval. Jingtian & Gongcheng is well versed in product principles and transaction plans of all major types of ABS projects related to real estate companies, from the asset securitization of accounts payable based on supply-chain reverse factoring and balance payment ABS with mortgage balance debt as its underlying assets, to CMBS and quasi-REITs based on operating revenues of holding properties or commercial properties. Their participation in over 30 real estate supply-chain ABS/ABN shelf offerings, mortgage balances, CMBS and quasi-REITs projects have equipped them with an abundance of practical experience in the segment of real estate assets securitization
Thirdly, professional and meticulous service. For risk control considerations, each project undertaken by project lawyers, Jingtian & Goncheng’s asset securitization team would strictly manage product files and archives. Detailed due diligence lists and interview lists would be formulated at the beginning of each project. Two central files—one electronic and one in printed copy—are required internally and the full set of due diligence documents would be collected before the issuance of any legal opinions. Some may consider preparing project drafts and files to typically be a part of the responsibility of the project manager, while Ms. Li believes the lawyers should also shoulder this responsibility, as a requirement for professional lawyers. Also, Jingtian & Gongcheng is one of the few law firms, that are capable of assisting managers in drafting product plans or prospectuses in the market. Given that lawyers need to issue legal opinions on the full set of transaction documents, in order to ensure the matching and consistency of the product manual and other transaction documents, and avoid conflicts and errors, we would simultaneously complete the main content of the manual when drafting the documents. After the manager supplements the statement with additional content, they will proofread all the documents before reporting. This careful, fully-aligned service is a fundamental requirement for lawyers and one of the reasons why many clients and managers are willing to choose Jingtian & Gongcheng lawyers to provide legal services for their projects.
Long-Term Vision and Professional Performance
Based on the current state and potential development of the asset securitization sector in the first half-year of 2020, Jingtian & Gongcheng adopted several measures to promote its ABS capabilities, including setting up cross-functional teams, organizing specialized training and knowledge-sharing sessions, and launching related R&D initiatives. In particular, ABSs and ABNs issued by non-financial services companies grew disproportionately relative to the ABS business as a whole. For example, corporate ABSs now span across accounts payable, leases and rents, TBRs, corporate rights of credit, CMBS, petty loans, consumption loans, factoring financing rights of credit, infrastructure and others. These ABSs have helped the firm to acquire not only considerable market share, but also a solid reputation for our work in this field.
According to Beijing Partner Fusheng Fu, the alleviation of the COVID-19 pandemic and the steady recovery of China’s economy creates favorable conditions for the demand and further growth of various assets-backed securities/notes issuances. He is confident in and places great expectations on Jingtian & Gongcheng’s ABS team. He anticipates that this team can continue to follow the regulatory rules closely and provide strong guidance to clients with professional, team-based services so that Jingtian & Gongcheng’s ABS business retains its leading role among its peers and achieves further growth and development.
For more information on the Jingtian & Gongcheng’s ABS practice, please click http://www.jingtian.com/Content/2018/09-26/1804016452.html
