Jingdong-CiticS No. 7 Baitiao receivables asset-backed securities
Securities Originator: Beijing Jingdong Century Trade Co., Ltd
Lead underwriter: Citic Securities
Choosing the winner for the best ABS/MBS award this year was an especially tough job. Many deals have stood out during the awards period and each has its own importance. Some attracted a record number of foreign investors. Others helped small and medium-sized enterprises to secure cheap funding. Some achieved record low pricing in the microloan ABS market.
However, one deal stood out from the rest in its daring to innovate as well as in its market-wide implications – Jingdong-CiticS No. 7 Baitiao Receivables ABS.
The deal, a Rmb1.5 billion ($213 million) four-tranche transaction sold in March, was the first asset-backed securitization deal in China to provide credit default swaps (CDS) for investors in the mezzanine tranche. The transaction is backed by a pool of small and diversified consumer loans. Based on the large data set from the issuer’s parent company, online shopping firm JD.com, the originator has formed user profiles and guaranteed the high quality of these consumer loans.
JD.com is China’s leading e-commerce platform with over 320 million active customers. Citic Securities has formed a close relationship with the issuer in recent years. In 2019, the firm was the lead underwriter on 13 out of 37 of JD.com’s ABS deals, according to Wind data.
Citic Securities has been the underwriter of many Jingdong Baitiao ABS products and has a deep understanding of the risks and investor group. Based on previous experience, CiticS introduced the CDS for the mezzanine tranche of Jingdong-CiticS No. 7 Baitiao Receivables ABS.
The Rmb60 million mezzanine tranche was priced at 7% and the CDS was priced at 180 basis points. The deal was the first time such a hedging product was used in the securitization market. After that, CiticS provided the CDS tool in two other corporate bond issuance.
CiticS, along with CICC, CSC and state-owned China Bond Insurance Co, are the only four securities houses qualified as CDS dealers.
The deal helped promote both the ABS market and the CDS market, which the regulator has been trying to make popular since September 2016. The creation of CDS for JD.com’s deal also helps expand the scope of potential investors in the mezzanine tranche as more risk-averse investors can now gain high returns with relatively low risk. This deal proves an effective way of mitigating the credit risks of private enterprise and therefore facilitates their bond issuance.