Raymond Zhang
On April 24th, Beijing Enterprise Water Group (China) Investment Limited (hereafter referred to as “The issuer” or “BEWG”) has successfully issued its first asset backed note (hereafter referred to as “ABN”) in 2017, for which SynTao Green Finance delivered an independent verification as a third party. The 2 billion RMB senior tranche of the 2.1 billion ABN is rated as AAA level. The duration of this ABN is 7 years and the interest rate for the first level of senior tranche is 3.8%. This is the lowest interest rate among the corresponding time and products, which is a strong signal from the market on how welcomed the green finance products have been, and will continuously be. The success in issuing this ABN in the interbank market has largely strengthened China’s young and wild green finance market.
What is Green Asset Backed Note (ABN)?
Asset backed note is a financing instrument used by non-financial enterprises at interbank bond market. The originator may finance and obtain cash through the issuance of ABN, and the principal and interest of the ABN will be repaid to the investors within certain time period, with the cash flow generated from the underlying assets. In October 2016, the National Association of Financial Market Institutional Investors (hereafter referred to as “NAFMII”) announced the Guidelines on Asset-backed Notes for Non-financial Enterprises (revised version) (hereafter referred to as “The new guidelines”). The new guidelines provide changes on the issue model and transaction structures of ABN through allowing special purpose vehicles (SPVs), addressing the nature of underlying asset and clarifying responsibilities. This had enriched the variety of underlying assets, optimized transaction structures, strengthened information disclosure and increased transparency.
Although there’s no clear definition of green ABN from the NAFMII, it is still traceable, by analyzing the issuer’s first green ABN, that they have followed NAFMII’s definition on green debt instrument. The underlying assets can align with the Green Bond Endorsed Project Catalogue and the proceeds can also be used in green projects like energy conservation, pollution prevention and control, resource conservation and recycling. SynTao Green Finance has delivered a double-assessment to BEWG’s green ABN: one for its underlying asset and the other for its proceeds allocation, through which ensured the “greenness” of this first green ABN.
How does the first green ABN work?
ABNs don’t regard the issuing company as the debtor, as green bonds do. Instead, they allocate part of the underlying assets to form an asset pool, use the cash flow going to be generated by the underlying assets as sources of repayment, and allow issuance in several tranches. These structures and characteristics add many advantages to those green asset securitization products with green-project-based underlying asset. Following is the structure of the BEWG’s ABN:
Structure of Beijing Enterprise Water Group (China) Investment Limited’s ABN
Underlying Assets: The underlying assets picked outstanding water treatment plans from the issuer, including 19 water treatment projects from 18 subordinate companies among 6 provinces, 15 cities. The assets allocation is safe and the cash flow is stable. SynTao Green Finance assessed all of its project design documents, project completion acceptance note, environmental approval documents, etc., and confirmed that all of its projects align with the Green Bond Endorsed Project Catalogue (2015 Edition), category 2 Pollution Prevention and Control-2.1.1 Pollution Prevention and Control -2.1.1 Facility Construction and Operation. This ABN applied the trust mechanism, which requires the originator sign a trust contract with the indenture trustee to establish a property trust, so that not being excluded from the balance sheet of the company.
Use of Proceeds: Proceeds of this ABN will be used to 9 water projects of the issuer, type of which include sewage treatment plant, river restoration and water supply network. After careful assessment, SynTao Green Finance regards that all of the 9 projects can align with the Green Bond Endorsed Project Catalogue, including 2 Pollution Prevention and Control, 3 Resource Conservation and Recycling and 6 Ecology Protection and Climate Change Adaptation. If successfully implemented, these projects could reduce 41,000 tons of water pollutant emissions annually, which stands for a huge difference. As these 9 projects have been under construction, SynTao Green Finance delivered a field research in one of the river division project to ensure the reliability of the assessment. SynTao Green Finance regards that there is no discrepancies between in-field information and the project documents, and there hasn’t been found, through preliminary judgment, any potential major environmental risk in the construction and implementation of this project.
Information Disclosure: Following the requirement of NAFMII’s M.16 form (Green Debt Financing Instruments Information Disclosure Form) and GP form (Green Verification Report Information Disclosure Form), SynTao Green Finance disclosed the information of the assessment to this green ABN, to ensure the completeness of the disclosure and the normalization of the assessment. SynTao Green Finance will continue to disclose the according information of the use of proceeds and environmental benefit generated in the duration of this ABN.
What is the Future of Green Asset Backed Securitization?
The asset backed structured financing products, like ABN, are excellent financing instruments for green-project-based enterprises. Firstly, green projects like water treatment, renewable energy and public transportation all have continuous and stable cash flow return, which provide good underlying assets for issuing green asset backed securities. Nowadays, the Chinese government is pushing the asset securitization of the public-private partnership projects, which has made it more approachable for green projects to raise proceeds through asset backed securities. Secondly, considering the fact that most companies in the green industry are still at their early stage, it is more practical for them to issue asset backed securities than to issue green bonds, because asset backed securities can separate the credit rating of the assets from corporate credit rating.
With this background, we foresee the rapid development of green ABN market in the near future. To ensure the healthy development of the market, it is necessary to have more strict green standard, more transparent information disclosure, stronger capacity of third party verifiers and more incentives to cultivate “green investors”. It is necessary to apply strict standard in selecting and distinguishing green assets or projects, so that there won’t be “green washed” projects. The capacity building of third party verifiers should be implemented through the industry’s self-regulation and communication mechanism. Through decent advertising, promoting together with sounding bonus and forfeit, we could increase the attractiveness of green finance products and awake investors’ senses of social responsibility and environmental conservation. There will be more domestic “green investors” and green finance products will achieve a normative market-oriented development.