What determines the issue price of lease asset-backed securities in China?

Abstract

In this study, a unique data set is used to examine the pricing factors of lease asset-backed securities (ABS) in China's primary securitization market. In addition to conventional risk factors, such as credit enhancement, underlying asset characteristics, credit rating, and deal structure, we find that originators (i.e., leasing companies) play a critical role in determining the issuing price of lease ABS in China, as state-owned originators and high profitability lessors are more likely to receive a lower initial yield spread. We also find that non-state-owned guarantors, as a form of external credit enhancement for a tranche, can significantly broaden the issuance spread, which is opposite to the situation in mature securitization markets. In addition, lease ABS investors in China may underestimate the risks posed by the diversification level of the asset pool of lease ABS, and reputable underwriters can help the product earn a lower yield spread in the primary market. Our findings indicate some similarities between the pricing factors in China's lease ABS market and those in mature securitization markets, although they still have their own unique features.