Zhang Boyuan, Cheng Chunxiao /Dagong Credit
Since the establishment of the "Eight Investment Group" in 2002, especially in the context of the 2012, bonds issued by municipal investment companies showed blowout growth. Bond issued by municipal investment company is the majority stock bond of Chongqing, which conforms to the overall features of the national bond market. Bond issued by municipal investment company is an important promoter of infrastructure construction in Chongqing, and industrial bond reflects the financing and development of pillar industries in Chongqing in recent years.
1. Bond Market Overview of State-owned Industrial and Commercial Enterprises in Chongqing
1.1. The scale of bond market continued to grow, but the proportion in total non-financial debt financing instruments of Chongqing was not high, and the growth rate has slowed down in recent years.
Since 2008, state-owned industrial and commercial enterprises bond market in Chongqing showed a rapid growth trend, apart from a slight drop in 2013, the number of issuers and the size of their offerings continued to expand. But the number of bonds in 2013 and 2016 fell down.
Chongqing's non-financial debt financing instrument has expanded rapidly, with a substantial increase from 6.25 billion yuan in 2008 to 236.47 billion yuan in 2016. But in recent years, the bond financing expansion of Chongqing local state-owned enterprises (excluding municipal investment companies) revealed an insufficient speed. Taking 2016 year as an example, Chongqing issued a total of 257 non-financial debt financing instruments, with an increase of 46 (about 28%) from 2015, an increase of 37.43% on the issuance size from 2015. While the local state-owned enterprises (excluding municipal investment companies) issued a total of 52 bonds, worthy of 37.88 billion yuan, with a decrease of 14 in amount, and an increase of 9.77% in value from 2015, which is 27.66 percentage point lower than Chongqing’s overall growth rate. It’s clear that since the establishment of the "Eight Big Investment ", the issuance size of the city continues to soar, and the investment in infrastructure construction has increased from 72.06 billion yuan in 2008 to 443.10 billion yuan in 2015. Since 2015, due to the frequent industrial bond risk, bond financing in local state-owned enterprises (excluding municipal investment companies) grows slowly.
1.2. Mainly non-public offering, lack of bond diversification.
Judging from the bond varieties, Chongqing state-owned industrial and commercial enterprises mainly issued privately raised company bonds, super & short-term commercial paper and private placement note, accounting for 40%, 23% and 17% respectively. Medium-term notes, corporate bonds and other medium & long-term public offering products were insufficient, what’s more, other innovative bonds such as project revenue bonds were unreleased. All these have showed a lack of diversity in debt financing instruments of Chongqing state-owned enterprises (excluding municipal investment companies), which needs to expand its financing channels. In addition, the large-scale issuance of short-term commercial paper and super & short-term commercial paper has exacerbated the short-term debt pressure of state-owned enterprises in Chongqing.
1.3. Credit ratings concentrated on AA- to AA+, good debt repayment, no default occurred.
Judging from the credit rating, 12 of the 52 state-owned industry enterprises didn’t disclose its credit rating situation. Among the rest 40 issuers, credit rating of 17 in the 40 shows AA+, 18 shows AA, and 5 AA-. On the one hand, the high proportion of private equity in Chongqing state-owned enterprises, which is 57.69%, resulted in a higher proportion of non-subject rating. On the other hand, there is no state-owned industrial and commercial enterprise with AAA that has issued in 2016. The representative of direct financing enterprise is Chongqing Chemical & Pharmaceutical holding (Group) Company (Hereinafter referred to as "Chongqing Chemical", AA+). Chongqing Medical issued the first short-term financing coupons early in the initial stage of bond market in 2006. But in 2016, due to industry downturn and intensified corporate debt burden, China Lianhe Credit Rating Co., Ltd. adjusted its credit rating outlook to negative, China Bond Rating Co., Ltd reduce its credit rating from AA- to A+.
For debt repayment aspect, although, frequent credit risk incidents, such as the Dongbei Special Steel and other local state-owned enterprises, has emerged since national industrial bond risk was intensified in 2015, Chongqing's state-owned enterprises (excluding municipal investment companies) has no default incidents yet, the overall debt repayment is good.
1.4. High concentration of the issuing industry and enterprise, mainly concentrated in the manufacturing, culture, sports and entertainment industry.
For industry aspects, the issuers of state-owned industrial and commercial enterprises in Chongqing areis mainly concentrated in the manufacturing, culture, sports and entertainment industries. Among which, the manufacturing industry is the highest, reaching 36.54% in 2016, which is corresponding to the industrial structure of Chongqing's manufacturing industry. Chongqing Chemical, Chongqing Machinery & Electronics Holding (Group) Company (Hereinafter referred to as "CME") and Chongqing State-owned Cultural Assets Management Company Limited (Hereinafter referred to as "CCA"), these three enterprises in 2016 issued a total of 18 billion yuan bonds, accounting for 48.54% of the whole state-owned industrial and commercial enterprises bond issuance. The industry debt in Chongqing state-owned enterprise and corporate concentration are high.
2. Proposals on the development of State-owned Industrial and Commercial Enterprises in Chongqing
With the development of capital market, the bond market of Chongqing’s state-owned enterprise is expanding continuously. The issuance of bonds and the number of issuers are on the rise. However, there are still some deficiencies in the growth rate of bond market capacity, the diversification of bond varieties, the credit level of the participating subjects and the industry diversity. The following are some development proposals on Chongqing’s state-owned industrial and commercial enterprises:
2.1. Increase the number of issuers and reduce the concentration of credit ratings and industry.
Despite the rapid expansion of bond market in Chongqing, the growth rate of state-owned industrial and commercial enterprise is significantly lower than that of municipal investment company. The rapid increase of bonds issued by municipal investment companies is reflected in the growing public welfare investment, infrastructure and supporting improvement in Chongqing. But it is the industrial bonds that objectively reflect the development of Chongqing's industrial and industrial economy, few issuers reflects that the financing structure of Chongqing’s state-owned business is still mainly indirect financing such as bank borrowing, only few enterprises have utilized direct financing instruments. Excessive reliance on bank borrowing will not be conducive to Chongqing’s state-owned enterprises to diversify the financing risk, it is difficult to find alternative financing ways to solve the financial pressures when bank financing channels narrows. In addition, after increasing the number of the subject, Chongqing’s state-owned enterprises will have more standardized information disclosure, the improvement in transparency helps to enhance investors’ confidence and participation, thereby promoting the development of bond market of state-owned enterprises in Chongqing.
Compared with similar economy scale in other cities, Chongqing’s State-owned enterprises show a high concentration of credit rating, all in AA series (AA- to AA+). The excessive concentration of credit grades of the issuing subject is one of the characteristics of the initial stage of bond market development. The lack of AAA issuers is unfavorable to the enterprise to play a leading role in driving Chongqing’s bond market. The companies below AA- can also enter the direct-financing market by introducing guarantees to enrich their financing, which can also increase investors with different risk preferences into the Chongqing bond market. On the other hand, the reduction of the industry and enterprise concentration will help disperse Chongqing’s regional default risk, avoid the rapid shrink in the region’s bond market resulted from risk incident when relying solely on individual enterprises to support the scale of a region's bond market.
2.2. Promote the diversification of bond varieties and improve the proportion of public offering and long-term bond issuance.
At present, the bond issued by Chongqing State-owned enterprises (excluding municipal investment companies) includes private corporate bonds, super & short-term commercial papers, private placement notes, medium-term notes, commercial papers and corporate bonds. But there are no relatively complex but innovative products such as exchangeable bonds and project revenue bonds. Improving the variety of bonds can help broaden the financing channels of the market. Different bond varieties have different but suitable issuers. Introduction of new products is conducive to expanding the participation of Chongqing State-owned enterprises in the bond market, contributing to the expansion of the bond market.
Currently, most of bonds issued by Chongqing State-owned industrial and commercial enterprises are private corporate bonds, super & short-term commercial papers and private placement notes, those three accounted for 80%. "Private offering" and "short-term" are the two major characteristics of them, which are contrary to national bond market with characteristics of "public offering" and "long-term". Public offering can improve the liquidity of holding bonds in terms of the investors, and it is conducive to lower the issuance rate for issuers to save the financing cost. At present, Chongqing State-owned industrial and commercial enterprises issue bonds mainly through private offering. In the future, we should actively explore the way of public offering for the enterprises with such advantages. In terms of the feature of "Short term", (super) short-term commercial paper has low cost. But from the perspective of business management, long-term and short-term debt should be mixed in a reasonable way. On the one hand, "short loan for long investment" will cause risk in project proceeds and debt repayment mismatch, and result in credit risk for enterprises with lack of cash flow or cash flow difficulties. On the other hand, the excessive proportion of short-term debt will lead enterprises to face the risk of centralized reimbursement; most default enterprises have the characteristics of excessive pressure pressure on short-term debt too much on the verge of default stage.
In recent years, the state-owned enterprise bond market of Chongqing has developed rapidly, but from the perspective of financing structure, the utilization of debt financing instruments is still insufficient. There are two problems to be solved urgently, first, the insufficient variety of issuers and bonds; second, the high concentration of enterprises and industry. Enterprises should pay more attention to the diversify debt risk through expanding financing channels, and actively seek the appropriate debt financing instruments, instead of relying on indirect financing methods such as bank debt. Financial institutions and government departments, such as local regulators and SASAC, should strengthen its exchange with the enterprises and promote a healthy and rapid development in the bond market of Chongqing’ state-owned industrial and commercial enterprises.