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Original caption: Severe punishment for “debt evasion” is not a return to just redemption, these challenges still exist after the Yongmei turmoil: China Business News
Severe punishment for “escaping from debt” is not a return to just redemption, these challenges still exist after the Yongmei upheaval
Zhou Ailin
On November 21, Liu He, a member of the Political Bureau of the CPC Central Committee, Deputy Prime Minister of the State Council, and Director of the Financial Stability and Development Committee of the State Council, chaired a meeting of the Finance Committee and proposed to severely punish various behaviors. of “debt avoidance” and firmly guard against systemic risks. Bottom line.
In general, institutions believe that severe penalties for “debt evasion” do not amount to returning to a rigid payment, but the Yongmei incident itself is not a complete market behavior and the follow-up should still pay attention to coordination at the central level.
S&P Global Ratings China corporate credit research analyst Li Chang told a China Business News reporter: “The recent credit risk events of state-owned companies will not cause systemic risks, and the default rate of existing bonds China is still well below 1%. Steps are being taken to address trust and corporate governance issues of concern to investors, such as malicious debt avoidance, and improve market transparency, leading to market-oriented debt restructuring. “
In the fourth quarter, the bond circle paid more attention to the subsequent development of the market. In particular, the fourth quarter of each year is the peak period for tax expenditures and urban investment. “At the end of the year, funds were already tight. Many urban investment firms have to borrow new and repay the old at the end of the year. The recent issuance of the primary market has taken a hit. The aftermath will last a relatively long time.” . A source from the investment banking department of a securities firm told a China Business News reporter that after the Dealers Association spoke, institutions were more sensitive to structured issuance. In the week after Yongmei’s breach of contract, more than 20 billion yuan The domestic bond issuance plan was canceled.
How to deal with the Yongmei incident?
Yongmei’s default resulted in a cross default by parent company Henan Energy and Chemical Group (hereinafter “Yunenghua”). The default of roughly 50 billion yuan in bonds by the two companies has worried the market that the government may be willing to allow large state-owned companies to default. Yunenghua is one of the largest state-owned companies in Henan province, dedicated to the chemical and coal industries.
“Debt evasion is not the same as default. SOEs stopped paying a long time ago, and severe punishment for debt evasion does not mean returning to fair redemption.” Li Chang told reporters that the credit situation of Yongmei and its parent company is weak. Data shows that Yunenghua’s ratio of debt interest, tax and earnings before depreciation and amortization at the end of 2019 is more than 9 times. It is not entirely unexpected that the two companies face credit pressures and defaults on bonds.
At present, how to define the Yongmei incident remains controversial. “On the one hand, there are market views that malicious debt evasion requires high-level coordination; on the other hand, credit debt has risks and investors are responsible for their investment behavior.”Founder’s valuesChief Economist Hue told reporters: “The Yongmei incident itself is not complete market behavior. Therefore, investors are not fully responsible for market risks. The central government may need to carry out some coordination. and proper management in the future. “
Although defaults in the bond market have become regular, S&P Credit Rating believes there is no systemic risk. In the case of SOEs, the will to support the government remains strong, but with the commercialization of some companies in the SOEs reform process, the trend towards credit differentiation may emerge even more.
Institutions strengthen bond selection and risk control
In light of concerns about weakening government support, Standard & Poor’s Credit Review believes investors are paying more attention to the individual credit status of companies. Previously, some radical institutions such as brokerage asset management “relied on faith” to buy bonds were unsustainable.
“For SOEs with a higher degree of commodification, the weaker the individual credit status, the lower the probability of obtaining timely support under stress scenarios, so the financial status of SOEs will continue to diverge,” Li said. Chang.
“The bond market has been volatile at the end of previous years, and many subscription funds will enter the evaluation period. The returns on the bond asset management products this year are not very good. If the net value falls furthermore, it can trigger the bailout of subscription funds, resulting in a lack of allocation power for non-banking institutions. ” Qi Sheng, chief fixed income analyst at Founder Securities, told reporters.
In the future, in addition to paying attention to the subject’s own situation, the credit situation of the parent company (if any) will receive more attention from investors for SOEs issuing bonds in the future. The Yongmei incident shows that “the strong mother and the weak son” constitute a significant risk. Specifically, if the credit quality of the parent is good, it can be an improvement of the credit quality of the subsidiary, on the contrary, the parent can drag the credit quality of the subsidiary.
However, “the son is strong and the mother is weak” is also common, especially in listed companies. Earlier, CBN reports mentioned that China has strict requirements for corporate listing, and most of the group’s companies will package the highest quality assets in the listing system. Within the group, publicly traded companies tend to have the highest profitability, the best asset quality and the lowest debt burden. For the above types of listed companies, if the parent company has a higher debt load, or the business situation is seriously worse than that of the subsidiary, it will have a negative impact on the credit status of the listed company.
S&P Credit Rating believes that if the publicly traded company is completely independent from the parent company and the parent company cannot exert significant influence on the operations or finances of the listed company, then the credit quality of the parent company has no impact on the issue.
The fourth quarter is the peak of urban investment demand
In addition, the Yongmei incident has also led to an increase in the number of bond issue cancellations and an increase in financing costs. The resulting liquidity risk has also attracted the market’s attention, especially the situation of urban investment and financing.
“From the perspective of the moment, the fourth quarter of each year is the peak period for fiscal and urban investment spending, and financing is needed to overcome difficulties. Due to the overlap of several special circumstances this year, it can lead to serious ‘lack of money'”. The aforementioned investment bankers said the reporter said.
A bond trader told reporters that, as of November 16, 2020, among the credit bonds issued by Henan, the cumulative stock of urban investment bonds reached 344.332 million yuan, ranking 13th in the country, with 72 issuers and a total of 25 bonds. Failure to comply can cause the cost of issuance to rise by a hundred or two hundred basis points and the cost of paying interest on urban investment will increase.
For a province, state-owned enterprises are roughly divided into four levels: provincial, provincial capital, municipal, and district / county. Regarding the current situation, once a breach of contract occurs in the province and it is not properly managed, even provincial level companies or provincial level companies will be affected to some extent. Investors believe the target may be risky, which can eventually lead to difficulties for lower-tier companies to issue or even issue judgments. The issuance costs of higher-tier platforms will increase, leading to increased financial costs.
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