Move to manage bond defaults

Pilot project introduced in China amid virus crisis, but method common overseas 

Move to manage bond defaults
China is trialing its first interbank bond swap. Image: iStock

(ATF) – A debt financing instrument has been a hot topic in China as it is being trialled as a method for settling default disputes.

Currently, the Chinese financial system is under pressure to implement a new Securities Law, which appears to have caused numerous serious issues. Critics say the law was forced through under pressure to maintain a façade of "business as usual" despite the dramatic Covid-19 outbreak.

The firm Sunder announced that due to the impact of the epidemic, liquidity is tight, so it plans to issue debt financing instruments.

Uncertainty over an existing debt – "17 Sander Engineering MTN001" (Beijing Sander Environmental Engineering Co Ltd 2017 first term medium-term notes) – spurred the move.

It is understood that the bond swap has become the first pilot project in the interbank bond swap business.

Oriental Jiacheng research and development analyst Mei Jia said in an interview with the Securities Daily the pilot project continues moves to create a bond risk disposal mechanism from 2019.

Over the past year there has been a significant increase in relevant guidance documents on the disposal of bonds that have suffered defaults and investor protection. The focus has shifted to the establishment of a sound market mechanism.

This change is seen as helping to eliminate the perspective of improving the default disposal mechanism and strengthening investor protection – the crux of the “difficulty” in handling credit debt default.

"This bond replacement will replace the old bonds with new bonds at 1:1, and the coupon rate will be increased by 50bp. For the issuer, the essence is to exchange time for space to alleviate short-term liquidity shocks," Mei Jia said.

According to public data, Sander Environment was established in 1999. Its main businesses include sewage treatment business, tap water business, ecological treatment business, and other technical consulting and engineering design business. 

Mei Jia noted that the replacement of risk bonds is a relatively common international debt management strategy. So, he said it was a timely move during the Covid-19 control period that would have positive practical significance.