Chinese car-hailing start-up Didi Chuxing announced that it has gained approval from the Shanghai Stock Exchange (SEE) to issue RMB10 billion (US$1.58 billion) in asset-backed security (ABS) products to fund its supply chain. The move, the first of its kind in China, marks a new and possibly risky way for Didi, and other companies, to expand their business.
ABS are bonds collateralized by pools of assets such as loans, leases, mortgages and credit card debt. This type of financial product carries additional risk as their value is based on a pool of underlying assets that are often hard to value. In the U.S., for example, the housing boom and subsequent crash in 2008 was largely due to the widespread bundling on low-quality mortgages into asset backed securities. The practice artificially drove up housing prices by enabling mortgages to be received by homeowners that were ultimately unable to pay their debts.
Didi’s ABS will be collateralized by the leasing claims by car leasing enterprises when leasing cars to drivers. DiDi will act as a proxy of the originators, responsible for the coordination of leasing companies, and issues bonds through bundling the underlying assets to the capital market. The value of the bonds, apparently, will be determined by the ability of drivers to pay for their vehicles.
In a statement, Did said that issuing the ABS enables the company to "play a pivotal role to help partner leasing enterprises raise funds through securitizing their stock assets." In short, its provides DiDi’s partner leasing companies with a new, low-cost funding channel to expand their businesses by bringing on more drivers.
The first issue under the program will be a RMB300 million (US$47.4 million) ABS to raise funds for new vehicle procurement by leasing enterprises in order to expand the transportation capacity of DiDi’s platform, Didi said.
“Using financial tools to serve the physical economy and incorporating modern finance into the industrial system are the general trend of the economic development,” said SSE in a statement, adding. “The issuing of the new transportation supply chain ABS is a key step by the SSE to urge the supply chain finance to serve the physical economy under the leadership of the China Securities Regulatory Commission.”