AOne of the most common underlying asset types in asset securitization, finance leases have long been at the forefront in terms of scale and size of issuance. In practice, when local rig leasing companies select leased assets for asset-backed securities (ABS), in addition to the requirement that lease claims meet the underlying asset standards, the underlying leased assets must also to be eligible.
But the issue of eligibility for securitization can sometimes be thorny in a gray area like a pipeline network, and raises many questions.
Q: What leased goods can be used?
To: The Civil Code of China and other laws and regulations clearly state that assets leased under finance leases shall not be fictitious. Otherwise, the contract will not be valid. The Provisional Measures for the Supervision and Administration of Financial Leasing Companies, issued by the China Banking and Insurance Regulatory Commission in 2020, provides that the leased assets of financial leasing operations must be assets fixed But they did not clarify the definition and scope of fixed assets beyond requiring that leased assets be “genuine”, “clearly owned” and capable of “generating income”.
In practice, reference is often made to Accounting Standards for Business Enterprises No. 4 – Fixed assets, which states that “fixed assets refer to tangible assets: (1) maintained for the purpose of producing goods, providing labor services, renting or trading. management; and (2) with a useful life of more than one fiscal year.
According to judicial practice, in addition to equipment, construction machinery, transportation tools and other movable property, factory buildings, commercial real estate and other real estate for the operation that meet the above standards can also serve as leased assets .
Real estate such as housing under construction, urban roads and safety housing, as well as intangible assets such as brands, patents and software cannot serve as leased assets because they do not generate income, their disposal is restricted or they are not assets materials.
Q: What are the requirements?
To: Normally, leased assets should meet the following requirements: (1) clear and undisputed ownership; (2) not subject to restrictions of rights such as mortgage and lien; (3) specific and single use; (4) commercially reasonable; and (5) not involving national defense, military, or other state secrets.
Availability and commercial rationality are particularly important. When applying for a project, it is generally necessary to make it clear whether the leased assets are available and profitable.
Q: Does a pipe network meet ABS requirements?
To: Rig leasing companies generally focus their businesses on public services, infrastructure construction and other public credit areas. Their financial leasing often affects the public welfare, making the leased assets unable to meet the requirements of availability and commercial rationality.
Since 2020, regulatory authorities have banned the use of urban roads, bridges and culverts as financial leasing assets and restricted the proportion of structures. However, due to the particularity of the gas pipeline network, opinions differ as to whether it is in structures.
Q: Is a pipe network a structure or a piece of furniture?
To: China’s laws and regulations stipulate that “property” includes buildings, structures and land annexes, but the structure is not clearly defined. The National Property Classification and Code Standard defines “structures” as man-made structures not intended for production or residence, supplemented by a list of structure types.
Among these, water pipes (water diversion pipes, drainage pipes, etc.) and municipal pipes are clearly classified as “structures”; water supply pipes as “transmission pipes” in general equipment; and oil and gas pipelines as “special equipment for petroleum and chemicals”, under special equipment. All of them are determined as movable property.
Q: Is a pipe network eligible if it is connected to real estate?
To: Although the gas pipeline network must be attached to land, housing or other immovable property to fulfill its function, its status as tangible movable property is not affected. As a leased asset, it retains the attribute of movable property and its independence.
Attaching these assets to real estate risks weakening the lessor’s ability to use them as collateral. However, this is an operational risk for the financial lessor and does not affect the identification of the gas pipeline network as movable property.
The Supreme People’s Court also held this view in the re-examination and trial supervision of the 2017 disputes over a loan contract between Sinohydro Beigu Construction Machinery and Chengdu Yuyi Silk.
Q: Is a single-use pipe network commercially reasonable?
To: A network of pipes is movable property and is therefore specific and independent. Although after the separation of real estate, it may suffer from reduced utility and moderate market liquidity, which means that it cannot be disposed of or realized in time. However, if a breach of contract occurs, there is no legal bar to the disposal of the leased assets under the lease.
In addition, although most pipeline networks do not charge users directly for the provision of transmission services, most of these fees are included in overall costs, except for water transmission pipeline networks and heat in industrial parks with clearly provided load standards. Therefore, the gas pipeline networks are indispensable auxiliary facilities for the main operation and profitability of the lessee’s business, justified in its commercial rationality.
Q: Tips for entering the pipeline network as a pool asset?
To: Judging by the recent issuance of finance lease ABSs by successful platform lessors, there is no obstacle to the entry of pipeline networks into the leased asset pool as long as availability standards are met, commercial rationality and other eligibility.
The authors suggest that managers who control pool assets focus on the following aspects when reviewing the eligibility of pipe networks: (1) confirm the certificate of ownership, such as the purchase contract, the invoice, acceptance certificate or equipment receipt; (2) inspect the registration of rights, such as verifying the completion of the financial lease registration on the website of the credit reference center of the central bank; (3) perform on-site inspections and due diligence to confirm the genuine specificity of the leased assets; and (4) review the leased asset evaluation report and internal project review documents to avoid overpriced purchase and reaffirm commercial rationality.
Adam Chen and Daniel Hsu are partners at AnJie & Broad Law Firm
AnJie & BB Law Firm
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