China's Alibaba Ecommerce Giant Seeks Asset Securitization Approval for Small Loans

The concept is pretty simple: Alibaba, China's largest ecommerce platform, set up a business to loan small sums to companies that use its services. In the next stage of the evolution of this program, Alibaba has applied to Chinese regulators for permission to securitize those loans. This means bundling them into financial securities which can then be sold and traded as investments.

What could go wrong?

Indeed. Securitization has a rich but troubled history. Mortgages were the first bundled product of this type. The idea was to provide more liquidity in the market, the goal of which was to attract more capital, thereby making lower cost loans available so that more people could afford to buy homes. As so often happens, the financial tail ended up wagging the housing dog. In their rush to meet the demand for more securities which produced high margins - and they claimed - little risk, loan standards were ignored, the quality of borrowers glossed over or fabricated and the result, when some of the underlying mortgages began to go bad, was the worst financial crisis since the Great Depression. And this was in allegedly highly regulated US and European countries.

As US and European securities regulators struggle to clean up the mess five years later, Chinese companies dominate the ranks of those being de-listed from stock exchanges for fraudulent accounting, exaggerated financials and operational discrepancies. Marrying the already fraught securitization market with the Chinese penchant for imaginative reporting suggests a melt-down to go.

It is, of course, theoretically possible that Alibaba and Chinese regulators will have learned from the western experience and will build in safeguards to prevent that from ever happening again. Theoretically.  JL

Zhang Bing reports in Caixin:

The small-loan business arm of e-commerce giant Alibaba Group is awaiting the securities regulator's approval for its new asset securitization plan.
The plan wraps up loans as investment vehicles to be bought by investors through an asset management scheme operated by Orient Securities Co. Ltd., a brokerage firm.

Orient has applied to China Securities Regulatory Commission (CSRC) to launch the scheme, but has not received an answer.
Money raised from the proposed asset management scheme would be used to buy loans made by Alibaba's Chongqing small-loan division. Investors can expect a six-percent annual return on their investment, with money generated by repayment of the loans, the broker's document shows.
Alibaba started its own small-loan business, called Aliloans, in 2009. It set up two subsidiaries, one in Chongqing and the other in Zhejiang Province, to run the business. Loans are provided to small and family businesses that operate on its e-commerce platforms.
The subsidiaries have a combined registered capital of 1.6 billion yuan. Under the regulation of China Banking Regulatory Commission, they can borrow up to 800 million yuan from banks to finance operations.
The companies have sought extra funding via trust companies. In 2012, they launched two trust products. The Chongqing version raised 240 million yuan and the one in Zhejiang raised 120 million yuan.
Meanwhile, they issued several loan securitization products through asset management plans of Orient and some securities investment fund companies.
Aliloans does not publish its financials, but a source close to it said it had loaned more than 26 billion yuan to over 129,000 small and family-owned businesses through company-related website platforms between April 2010 and July 1, 2012.
As of July 2012, the Chongqing subsidiary has lent out a total of 5.6 billion yuan, with 921 million yuan in outstanding loans, the broker's document shows.
Its non-performing loans (including loans in the categories of substandard, doubtful and loss) accounted for less than 0.2 percent of all those outstanding, the document shows.
The ratio was low because borrowers were afraid that missing payment to Aliloans would hurt their business on Alibaba's websites, a securities fund manager familiar with the company said.
Besides, the interest charged by Aliloans is often around an annualized 18 percent, more favorable than the rates offered by other small loan companies, he said.
Shares of the proposed asset management plan are graded, with 90 percent under the category of preferential and the rest subordinate. The plan says investors would subscribe to preferential shares through Orient's asset management plan, and the rest would go to Aliloans. This means Aliloans would receive repayment on its investment to the scheme only after the interests and principle of all other investors are repaid.
The arrangement is commonly used in bank loans securitization, a banker familiar with the operation said. Keeping at least 10 percent of securitized loans strengthens investor confidence because it aligns the issuer's interest with those of other investors, he said.
Aliloans is to continue monitoring the non-performing-loans ratio of securitized loans. When the ratio exceeds 5 percent, it should stop rolling over investors' money to fund further lending, Orient's document shows.