(ATF) Chinese regulators have changed the registration system for the public issuance of corporate bonds.
On February 26, the China Securities Regulatory Commission issued revised Administrative Measures for the Issuance and Trading of Corporate Bonds. These clearly implement a registration system for public issuance of corporate bonds and prohibit structured issuance, according to 21st Century Business Herald.
Previously, the Shanghai and Shenzhen Stock Exchanges formulated rules to improve and optimize corporate bond issuance and for a listing review rules system. They also clarified the review standards and information disclosure requirements for corporate bond issuance and listing after the implementation of the registration system, so as to achieve a standard guiding role by market entities.
In March 2020, China formally implemented its revised Securities Law. At the same time, the General Office of the State Council issued a "Notice on Implementing the Relevant Work of the Revised Securities Law", clarifying the registration system for the public issuance of corporate bonds. This meant specific management measures for the registration of public issuance of corporate bonds were urgently required.
According to reports, the Shanghai and Shenzhen Stock Exchanges have implemented an issuance supervision system that is pre-reviewed by the stock exchange and simplifies approval procedures of the Securities Regulatory Commission that have been in place since 2015. Therefore, the registration system for the issuance of corporate bonds has not been fully effective, so this new more efficient system was devised. The promulgation of "Management Measures" aims to make up for the lack of corresponding rules and systems.
Three positives, two negatives
Specifically, the revised "Administrative Measures" clarify the three positive conditions for the public issuance of corporate bonds, that is, the issuer should have a sound and well-functioning organisation, and the average distributable profit over the last three years should be sufficient to pay for corporate bonds, with interest for one year on hand, and should have a reasonable asset-liability structure and normal cash flow.
The Administrative Measures also stipulate two negative conditions for the public issuance of corporate bonds: The issuer must not have "a continuing debt default situation", and must not change the use of raised funds without authorisation.
The Administrative Measures also say the public issuance of corporate bonds shall be accepted and reviewed by the stock exchange and must be submitted to the China Securities Regulatory Commission (CSRC) for registration.
While liberalising the issuance of corporate bonds, the Administrative Measures also explicitly prohibit structured issuance – "issuers shall not directly or indirectly subscribe for corporate bonds issued by themselves in the issuance process."
The so-called "structured issuance" refers to the behavior of entities with weaker qualifications since the end of 2017 to subscribe for bonds issued by themselves by subscribing to inferior asset management products and adding leverage.
Structured issuance has been problematic since the second half of last year due to regulatory guidance and increased difficulty in low-qualified bond repurchase financing. The "Notice on Regulating Matters Concerning the Issuance of Corporate Bonds" issued by the Shanghai Stock Exchange on December 13, 2019 also clearly stated that "issuers shall not directly or indirectly subscribe for bonds issued by themselves during the issuance process."
A CICC fixed income analysis pointed out that the implementation of the Management Measures may make it difficult to conduct structured issuance in the future.
It is worth mentioning that the Administrative Measures also clarified relevant provisions for underwriting agencies to establish accountability mechanisms to prevent excessive incentives and low-price competition.
The Administrative Measures state that corporate bond underwriting agencies shall comprehensively evaluate project implementation costs and risk responsibilities, reasonably determine quotations, and shall not solicit business by means of unfair competition such as a pricing level significantly lower than the industry.
In addition, the underwriting agency should also formulate a reasonable salary assessment system, and must not carry out corporate bond underwriting business through contracting methods such as business contracting, or implement excessive incentives in other forms.
"The issuance of bonds at low prices is bluntly a market-oriented behaviour, and its existence is also reasonable. However, low-price competition has disrupted the market in some cases. Judging from various recent statements, the supervisory authorities have been cracking down on bond and equity issuance. The attitude of low-price behaviour is very serious.” a senior investment banker in Beijing said.
In recent years, the low-priced issuance of corporate bonds has been repeatedly prohibited.