Research and reports

Guangzhou Metro Group's Subway Passenger Fare Income Claim Right Green ABS

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(Provided by Morgan Stanley Huaxin Securities[1], 2019)

Summary:

As China's first green asset-backed security based on subway passenger fare income, Guangzhou Metro Group’s green ABS innovatively utilizes the subway passenger fare income claim right as the underlying asset that is closely related with the operating income of subway enterprises, creating a brand-new class of underlying assets and breaking through the limitation of utilizing underground space rent and other non-operating income as underlying assets to issue ABS products. The ABS has obtained Double Green Authentication from green bond evaluation institution as having both a green subject and green underlying assets. It has also been granted RMB 5 billion shelf offering provision by Shenzhen Stock Exchange, becoming a rare "Double Green Authenticated" shelf offering of ABS product highly recognized by Shenzhen Stock Exchange.

The first phase of this project, RMB 3.158 billion, and the second phase, RMB 1.842 billion, were issued successfully in March and September 2019 respectively, helping revitalize existing assets, broaden financing channels, reduce financing costs, and set up an image of green financial innovation in the market for Guangzhou Metro Group.

 

I. Background and Financial Demand Analysis

Established in November 1992, Guangzhou Metro Group Co., Ltd. (hereinafter referred to as "Guangzhou Metro") is a wholly-owned subsidiary of Guangzhou State-owned Assets Supervision and Administration Commission, with a registered capital of RMB 58.425 billion. It is responsible not only for the construction and operational management of the urban rail transit system in Guangzhou, but also for running diversified businesses based on the development of metro-related resources.

Guangzhou Metro is managed through the mechanism of business departments and the approach of investing in the setup of subsidiaries: the business departments are the operators of the company's main businesses, undertaking the four major businesses including construction, operation, property development and resource management; the subsidiaries mainly undertake the external-facing service business of the industry. At the end of 2019, in the consolidated financial statement of Guangzhou Metro, the gross assets amounted to RMB 389.247 billion, and net assets is RMB 217.791 billion, with operating income reaching RMB 12.234 billion, and net profit achieving RMB 1.044 billion.

With several subway lines under construction, Guangzhou Metro needs substantial amount of capital, and hopes to develop a more innovative and sustainable financing model besides bank loan and traditional bond financing.

 

Ⅱ、Specific Measures and Project Highlights

(Ⅰ) Specific Measures

With the approval in relevant government documents, Guangzhou Metro is granted the right to claim passenger fare of certain subway lines as its revenue. Guangzhou Metro has transferred to a special plan the right to claim the passenger fares of two selected lines as the underlying assets during the continuance period of each special plan respectively.

The plan manager raises funds from ABS investors through setting up such a special plan, and utilizes the funds raised through this special plan to purchase from the original asset owner the underlying assets. The plan manager pays the purchase consideration and meanwhile becomes representative of the special plan to manage, utilize and dispose assets of the special plan in accordance with the provisions of the special plan documents.

Among them, according to Guangzhou Metro’s actual needs as the original asset owner, during the issuance of the first phase green ABS based on Guangzhou Metro passenger fare income claim right in 2019, assist are provided in screening the underlying assets and designing product structure, which successfully reduced the original asset owner's precipitation funds, with the prioritized 01-05 tranches reaching AAAsf grade, and the prioritized 04-05 tranches enabling clauses of put provision and buy-back option. While satisfying the demand in issue size, the product won favor from investors, and also reduced the cost of issuance for the issuer. When issuing the second phase green ABS of Guangzhou Metro in 2019, with Guangzhou Metro’s requirements of matching operating cash flow characteristics of the lines included in the asset pool, and further improving the efficiency of capital utilization, the product structure was adjusted, and the prioritized ABS term was designed to be 3+3+3+1 years, which no longer divides tranches according to years, and enables put and buy-back options every three years to meet investors’ needs for varied investment periods.

 (Ⅱ) Project Highlights

1. It is the first green ABS based on subway passenger fare claim right. The green ABS of Guangzhou Metro, as the first subway passenger fare claim right ABS project in China, innovatively utilized the metro passenger fare income claim right as the underlying asset that is closely related with the operating income of the metro enterprise, breaks through the limitation of utilizing only underground space rent and other non-operating income as underlying assets to issue ABS products, and obtains Double Green Authentication from green bond evaluation institution as having both a green subject and green underlying assets, becoming a rare "Double Green Authenticated" shelf offering of ABS product on the market.

2. Innovative transaction structure creating an industry exemplifying effect. As the first ABS project domestically based on subway passenger fare income claim right, this project is of great importance in innovating, benchmarking, and exemplifying in the aspects of defining underlying assets, designing transaction structure, setting cash flow incoming path, and arranging credit enhancement measures. It became an excellent example for metro enterprises in other China cities to take reference when issuing ABS products based on subway passenger fare income. Enlightened by the example of Guangzhou Metro, Beijing Metro also adopted a similar transaction structure, and issued the subway ticket tolling right green ABS products in June 2019.

3. Revitalizing the existing assets, broadening financing channels, and reducing financing costs. Utilizing the passenger fare income claim right as the underlying assets to issue asset-backed securities, Guangzhou Metro is in fact financing with discounted cash flows of future operating income, thus revitalized the existing assets from income claim right, broadened the direct financing channels of the infrastructure industry on the basis of project loans, financial lease and bonds issuance, reduced the cost of financing, and formed a virtuous circle that starts by investing in construction, and goes to operation, then to recovering capital by securitizing operation income, and ends at investing in new construction projects.

 

Ⅲ. Results Achieved and Impact Realized

(Ⅰ) Addressing the financing demand of enterprises and reducing the cost of financing

Guangzhou Metro has successfully completed two phases of green ABS issuance, realizing record low interest rates compared to bonds with same terms since 2017, further reducing financing costs for Guangzhou Metro. Meanwhile, with Guangzhou Metro’s requirements of matching operating cash flow characteristics of the lines included in the asset pool, and further improving the efficiency of capital utilization, the two phases’ products adopt different tranche structures to meet the varied needs of different types of investors.

(Ⅱ) Strongly supporting the construction of green public transportation system in Guangzhou

The approval and successful issuance of green corporate bonds have greatly enhanced the financing flexibility of Guangzhou Metro, strongly supported the construction of a green public transportation system, and will further strengthen the agglomeration and radiation function of Guangzhou as a national central city and one of the core cities of Guangdong-Hong Kong-Macao Greater Bay Area.

(Ⅲ) Good exemplifying effect among society

Once approved, the green bonds of Guangzhou Metro have attracted extensive attention from the society and are widely covered by media. Various communities agree on the exemplifying significance of the Guangzhou Metro green bonds as a financing innovation of major projects in Guangzhou.

 

Ⅳ. Lesson Learned and Policy Suggestions

1. Project difficulties – The assets of metro passenger fare income claim right have two characteristics – stable cash flow and huge volume, which can serve as suitable underlying assets to conduct green securitization. However, since many cities have pledged the tolling right of subway lines when the lines were built, the difficulty significantly increased in de-pledging and financing through securitization, making subway enterprises’ non-operating business income such as underground rent the only option as the underlying assets to issue securitized products. In addition, subway lines crisscross, making it difficult to identify the ticket income of certain lines and to forecast future cash flows.

2. The lessons learned and can be promoted – The income claim right of Guangzhou Metro lines included in the asset pool has not been pledged, and the enterprise has an advanced clearing system to identify ticket income from certain lines, which laid a solid foundation for the project. According to Guangzhou Metro’s reality and actual needs, the intermediary organizations including our company fully coordinated with Guangzhou Metro, and successfully completed the application of a shelf offering scale of RMB 5 billion as well as the issuance of two phases’ products, and also continuously optimized the structural design throughout the course of the issuance.

With Guangzhou Metro offering this best practice, the issuance of green ABS based on passenger fare claim right has been successfully applied to Beijing Metro, and in the future, it will be further promoted in more domestic cities with urban subway networks, thus opening up the door of green financial innovation for metro enterprises in major cities to revitalize their existing assets and reduce their financing costs.

3. Constructive policy suggestions – To provide matching policy support for green ABS financing, including approval fast track, investor tax preferences and risk accrual preferences. Combined with the development of urban rail transit system in Guangdong-Hong Kong-Macao Greater Bay Area, the green ABS based on metro passenger fare income claim right should be further promoted in the core cities, such as Shenzhen, in Guangdong-Hong Kong-Macao Greater Bay Area, and more green ABS products should be explored based on public transportation passenger fare income claim right such as intercity rail transit system and urban BRT rapid transit system in Guangdong-Hong Kong-Macao Greater Bay Area, thus to extend to other provinces and regions in due time.