Bonds Apr 28

China tightens issuance of corporate bonds, developers blocked

Guidelines issued by Shanghai and Shenzhen stock exchanges seek to limit investment companies and developers' access to funding and restrict the scale of local governments' hidden liabilities, amid concern pockets of excess debt could rock the financial system

Developers blocked as China tightens issuance of corporate bonds
Stock exchanges in Shanghai, seen here, and Shenzhen are helping financial regulators to tighten operations of China's bond market by limiting the amount of money that real estate developers can raise and trying to prevent secret deals by local officials and investment companies that burden provincial agencies with greater hidden debt. File photo: Reuters.

(ATF) The Shanghai and Shenzhen stock exchanges have issued bond issuance rules and listing guidelines, which specify the key issues of corporate bond review and related information disclosure requirements.

Both of these guidelines note that urban investment companies which apply to issue corporate bonds should comply with relevant regulations on local government debt management, and no new government debts should be added. 

They say if funds raised are used to repay stock debts other than corporate bonds, the issuer must reveal details of the debts to be repaid and vow that they do not involve hidden local government debt. 

If the total assets of urban construction enterprises are less than 10 billion yuan or their credit rating is lower than AA (inclusive), they should evaluate their own business and solvency, prudently determine the corporate bond declaration plan, and adjust the scale of the corporate bond declaration and adjust the fundraising if the use of funds aims to repay existing bonds and other measures to strengthen the issuer's ability to guarantee debt repayment.

The exchange guidelines also note the key concerns of real estate companies: the companies declare bonds to be issued, and the issuer has a high debt-to-asset ratio after deduction of advance receipts and contract liabilities, a high net debt ratio, or the extent to which cash covers short-term debt.

In lesser cases, repayment arrangements for a bond should be refined in light of operating conditions and financial conditions during the reporting period, and practical and feasible debt repayment guarantee measures should be formulated.

China issued a record amount of bonds last year to help rebuild its economy, which was ravaged by the downturn caused by the coronavirus pandemic. The economy has rebounded since the lockdowns imposed a year ago, but the central bank and financial regulators are now seeking to deleverage and tackle pockets of hidden debt accumulated by officials running various cities, provinces and counties, which is estimated to total almost 15 trillion yuan ($2.3 trillion).

Regulators – and investors – fear such a debtload will make it harder for the issuers to repay their future borrowing obligations. The hidden debt is separate to that accrued from bond sales, which are recorded in authorities’ balance sheets.

Tightening bonds of weak issuers

The latest move by the two stock exchanges – their guidelines on bond issuance (which are basically the same) – aims at tightening bonds issued by weakly qualified issuers. 

If the total assets of urban investment companies are less than 10 billion yuan or their rating is lower than AA (inclusive), the difficulty of issuing bonds is bound to increase.

The guidelines also require that if the balance of non-operating accounts and borrowing exceeds 3% of total assets, clear information disclosure and warning of major risks are required. If it exceeds 5%, a commitment not to increase is required. For 10%, the raised funds can only be used to repay corporate bonds. 

This last clause will have a relatively large impact on urban investment companies, as many are just a financing platform – the funds obtained are provided to the municipal construction department for infrastructure construction or infrastructure they want to build, to form a larger scale of other receivables. 

Similar non-operating funds flow more frequently. This regulation will restrict the scale of financing that platform-type urban investment companies can attain. The aim is to restrict the scale of local government's hidden liabilities.

The part involving developers focuses on the three red lines, announced in the third quarter of 2020 in a bid to control the scale of real estate businesses' interest-bearing debts. That means developers who exceed the three red lines will also face tight financing.

Further developments

Meanwhile, there were four other major regulatory and credit policy developments in recent days to improve the operation of local markets:

(1) The State-owned Assets Supervision and Administration Commission (SASAC, which is a branch of the State Council), urged businesses to organize special debt risk investigations to resolutely prevent bond defaults;

(2) The China Securities Association released key work points for 2021 to study and formulate negative aspects of convertible bonds;

(3) Central bank Governor Yi Gang said that in the future, a mandatory information disclosure system will be set up, step-by-step, for green finance;

(4) Projects involving coal and other fossil fuel energy will no longer be included in the scope of green debt support.

On April 16, Peng Huagang, secretary-general of SASAC, said it would continue to strengthen risk management and control in key areas such as debt, capital, and finance of central enterprises, while striving to better identify risks, via early warning and response capabilities, and intervening in advance to nip risks in the bud. He urged central enterprises to conduct special investigations into debt risks to ensure the overall stability of debt ratios, and on the premise of ensuring stability and resolutely preventing bond defaults.

And on April 22, the China Securities Association issued a report which mentioned studying and formulating a negative list of convertible bonds to strengthen market regulation. It will help to promote innovation in the regional equity market, while providing opinions and suggestions.

Last week, the governor of the People's Bank of China, Yi Gang spoke at the Boao Forum about setting up a mandatory information disclosure system for green finance. He said that financial institutions need to report on green financial bonds issued in the interbank market and how those 'green credit' is used. "In the future, we will also establish a mandatory information disclosure system step by step to cover all financial institutions and financing entities and unify disclosure standards," he said.

The central bank also said it would no longer include coal and other fossil fuel energy projects as being eligible for 'green bond' support.

The National Development and Reform Commission and the China Securities Regulatory Commission recently jointly issued a "Catalogue of Green Bond Support Projects (2021 Edition)", which will be implemented from July 1. It catalog adds green projects eligible for support such as carbon dioxide capture, utilization and storage, and green projects for clean heating in rural areas. 'Clean coal' projects have been dropped to better comply with international standards.


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China Shanghai stock exchange Shenzhen stock exchange bond guidelines weak issuers blocked Access to funding tightened Deleveraging PBoC local governments hidden debt concerns