Research On Credit Enhancement In PPP Asset Securitization

In recent years,in order to improve the efficiency and quality of public services,Chinese government has actively adopted the PPP model to cooperate with social capital.However,the participation of social capital has not been active due to the large investment in the upfront capital,long duration and low yield of PPP projects.However,the stable cash flow of PPP projects in the future can be transformed into marketable securities through securitization,which can improve the liquidity of assets and provide a channel for social capital to exit early.Credit enhancement is a core part of PPP asset securitization,which can reduce the credit risk of asset-backed securities and enhance their credit rating,and is of great significance to promote the development of PPP asset securitization.There are not many PPP ABS that have been successfully issued so far,this article selects Jinglan Muhe PPP ABS,which is the most used case of credit enhancement,to study two questions: first,under what conditions can credit enhancement really reduce the credit risk of the product;second,can higher degree of credit enhancement reduce the issuance cost.First,this paper describes the basic principles of the PPP model,asset securitization and PPP asset securitization.On this basis,the paper defines the meaning of credit enhancement and provides an in-depth analysis of the three main effects of credit enhancement: reducing product issuance costs,achieving social Pareto improvements and making more assets securitizable.Based on the discussion on the classification of credit enhancement,this paper proposes an analytical framework for judging the effectiveness of credit enhancement: for internal credit enhancement,the stability of cash flow of the underlying assets is mainly analyzed based on macroeconomics,industry conditions and regional development;for external credit enhancement,the credit risk of the credit enhancement subject is mainly analyzed based on accounting information and market information;in this paper,with reference to the research findings of scholars and the analysis practice of the industry,14 accounting indicators are selected in seven aspects of the accounting information-based model and three indicators are selected in two aspects of the market information-based model to form an analytical framework for enterprise credit risk.On the basis of theoretical research,this paper selects the case of Jinglan Muhe PPP ABS for in-depth study.In the case study,this paper analyzes the stability of the underlying asset cash flow based on the local government’s ability and willingness to repay its debts,and the credit risk of three external credit enhancement providers,Jinglan Muhe Co.,Ltd.,Jinglanmuhe’s parent company Kingland Technology Co.,Ltd.,and another third-party Shenzhen HTI Group Co.,Ltd.,based on the above credit risk analysis framework.The study found that the local government’s financial strength is weak,making it largely uncertain whether the cash flow of the basic assets can timely repay the investors in full;the effect of credit enhancement provided by Jinglan Muhe for asset-backed securities is not good because Jinglan Muhe’s own liquidity is poor;Jinglan Technology itself is weak in liquidity and debt service capacity,and its profit is in a large correlation with Jinglan Muhe,so the credit enhancement provided by it is also basically ineffective;in the end,only the professional third-party guarantee institution Shenzhen HTI Group Co.,Ltd.provided the most effective credit enhancement,its financial indicators have shown its high liquidity and strong debt service capacity.Finally,this paper selects two comparable PPP ABS projects based on the characteristics of Jinglan Muhe PPP ABS and further investigates the relationship between the degree of credit enhancement and financing costs.First,the risk indicators of the most effective external credit booster in the three projects were compared and analysed;second,the credit booster was given a score for each financial indicator related to credit risk by reference to the "scorecard" model commonly used by credit rating agencies in determining credit ratings,and the total score was used as a proxy for its credit booster status.The study found that the higher the total score of the credit enhancement provider,the lower the cost of financing the security,controlling for other conditions being consistent.This suggests that there is a negative correlation between the degree of credit enhancement and the cost of financing.In conclusion,through the above case analysis,this paper finds that professional external credit enhancement is a win-win option for both investors and issuers,it can not only effectively reduce the credit risk faced by investors,but also reduce the financing costs of issuers and achieve Pareto improvement in society.Therefore,under the current situation of slow development of the PPP ABS market and single credit enhancement method,we should focus on the development of professional external credit enhancement,improve the analysis framework of credit enhancement effectiveness,and at the same time promote information disclosure in the ABS market,strengthen empirical research of the relationship between the degree of credit enhancement and financing costs,improve relevant laws and regulations,so as to attract more participants to participate,and promote the development of the PPP ABS market.