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Recently, Shenzhen Stock Exchange (SZSE) completed the review of the 2018 annual reports on corporate bonds and asset-backed securities ("fixed income products"). The overall operation of the issuers is stable, and the disclosure of the annual reports is more timely, effective and standardized. In the review of the annual reports, SZSE earnestly improved its forward-looking supervision, highlighted key points and set clear objectives, and emphasized the identification and classification of the overall solvency risks of fixed income products. Focusing on the solvency of issuers and the stability of cash flow of underlying assets, SZSE issued more than 190 letters of inquiry on annual reports, raising more than 1,000 questions.
According to an officer of SZSE, SZSE is currently going through the important risk clues found in the annual report review, strengthening risk monitoring and investigation, and actively taking measures to prevent and mitigate risks. At the same time, SZSE will continue to fulfill its front-line regulatory responsibilities, improve regulatory effectiveness, raise issuers' awareness of honesty and trustworthiness and standardize their operation, urge the managers to diligently and conscientiously safeguard the rights and interests of holders, so as to work together to promote the high-quality development of the fixed income market of SZSE.
The overall quality of annual report disclosure is improved
To improve the disclosure of 2018 annual reports, SZSE has made plans and arrangements in advance, issued the Listing Rules for Corporate Bonds (Revised in 2018), the Rules Governing Listing and Transfer of Private Placement Corporate Bond, the Guidelines on the Content and Format of Periodic Reports for Asset-backed Securities and the Annual Report Disclosure Notice, organized several special training sessions to communicate the requirements for information disclosure and improve issuers' awareness of standardized operation. SZSE adopts the concept of supervision by type to improve the efficiency of supervision, and has achieved positive results in the disclosure of annual reports. For the first time, issuers with AAA credit rating are given flexibility in making disclosures to focus on enhancing the pertinence and effectiveness of annual report disclosure.
Firstly, the timeliness of annual report disclosure is improved. There are 632 bond issuers (389 unlisted issuers) and 245 asset-backed special plans in SZSE which are required to disclose annual reports. The disclosure rate of bonds and asset-backed securities before April 30 is 96.7% and 99.6%, respectively, 0.3% and 1.9% higher than the previous year. For bond issuers, special plan managers and trustees who fail to disclose their annual reports on time, SZSE immediately investigated their risk of product solvency and took relevant regulatory measures to give warnings.
Secondly, the disclosure of annual reports is more standardized. The issuers or special plan managers basically prepared the 2018 annual reports in accordance with the annual report guidelines or format guidelines. In respect of bonds, the contents of 2018 annual reports are more adequate, and there is a significant decrease in the use of periodic report instead of interim announcement in disclosing important matters. In respect of asset-backed securities, for the first time, plan managers and trustees prepared the 2018 annual reports in accordance with the requirements for periodic report format guidelines. They disclosed the information on underlying assets, cash flow collection, operation and financial position of specific original stakeholders in a more standardized and detailed manner, and revealed the risk of major events that may affect the operation and income distribution of special plans more fully.
Focus of supervision is placed on the disclosure of solvency
In 2018, the profitability and debt scale of bond issuers in SZSE were generally stable. Their income continued to grow and operation kept stable. The average operating income and average operating profit increased by 16% and 7% respectively compared with the previous year. However, affected by the market environment and rising financing costs, net cash outflows from issuers' investing activities and net cash inflows from financing activities decreased by 32% and 79% respectively compared with the previous year. Based on the regulatory practices and the characteristics of credit risk, SZSE was risk-oriented and problem-oriented. Focusing on the two dimensions of companies exposed to risks and risk matters, SZSE surveyed and predicted risks of solvency and cash flow collection of underlying assets from the aspects of operation ability, profitability, solvency, cash flow status, corporate governance, and standardized operation.
Firstly, SZSE closely watched the possible impact of matters involving non-standard audit opinions on solvency. 38 issuers were issued non-standard unqualified audit reports, up from 13 last year. Among them, there are 12 unqualified with an explanatory paragraph or modified wording, 3 unqualified with a paragraph on major uncertainties about going concern, 11 qualified audit reports and 12 audit reports for which opinions cannot be given. Non-standard audit opinions were given mainly because of large losses, overdue debts, material defects in standardized operation or limited audit scope. SZSE made a painstaking investigation as to the impact of related matters on the issuers' sustainability and solvency based on the nature and scope of the matters.
Secondly, SZSE enhanced inquiry as to abnormal accounting subjects or financial indicators. Considering the industry development cycle, fluctuations in financial indicators of peers, and the articulation accounting subjects, SZSE urged issuers to give a reasonable explanation and make adequate disclosure in time when identifying abnormal accounting subjects or financial indicators. For example, if the gross profit rate is obviously higher than that of the peers, SZSE will require the issuer to explain the reasons and rationality based on its specific business structure and business model; if the growth rate of accounts receivable is significantly higher than the growth rate of business income, SZSE will require the issuer to explain whether the company's operating capacity has undergone significant changes, whether the provisions for bad debts are adequate and how will the cash flow be affected; in the case of high deposit & loan and interest cost significantly higher than interest income, SZSE will find out whether there is undisclosed large amount of restricted funds and whether the acquisition of high-cost external financing is reasonable when there is a large amount of funds on the books.
Thirdly, SZSE fully understood the reasons for the rapid growth of issuers' investment and financing scale. For issuers maintaining high asset-liability ratio or rapid growth, SZSE will require them to explain whether there is short-term debt repayment pressure and centralized risk, and urge them to make timely arrangement and preparation for bond repayment funds; for issuers who expand their principal business and their net cash flow of related investment is a significant negative figure for many years, SZSE will require them to disclose the necessity of capacity expansion, the matching of production and marketing capabilities and the pressure on cash flow; for issuers who are mainly engaged in extended mergers and acquisitions, SZSE will focus on the risk of diversification and its impact on bond solvency.
Fourthly, SZSE paid continued attention to corporate governance and standardized operations. In the use of raised funds, SZSE focused on the compliance of the use of such funds. In recent years, CSRC has maintained stringent requirements for self-inspection by the issuers and on-site inspections, in this context, circumstances where the fund-raising accounts were not used for their intended use, the raised funds were not used according to approval or agreed purpose were greatly improved, or such matters have been corrected during self-inspection or on-site inspection. In corporate governance and internal control, SZSE continued to focus on the occurrence of large pledges of assets, external guarantee, foreign investment, fund lending or related party transactions.
Fifthly, SZSE paid full attention to the cash flow changes in the underlying assets of special plans. SZSE paid close attention to the difference between the actual cash flow and the predicted cash flow of underlying assets during the reporting period, and put focus on whether the cash flow was collected on time and in full according to the special plan. For special plans where the actual cash flow has a significant decline compared with the forecast value and the cash flow is not collected according to the agreement, SZSE will inquire the manager in time about the reasons for the decline, the reasons for the failure to collect cash flow according to the agreement, the impact on the special plans and so on, so as to find out the potential risks in relation to the special plans.
Enforcing strict supervision to form joint forces in screening and controlling risks
SZSE has always placed the prevention and control of risks in the bond market and the maintenance of the stable operation of the market in a prominent position. It has strengthened its frontline regulatory functions, enhanced penalties for violations of laws and regulations, deepened risk monitoring and control, focused on key issues and weaknesses, and taken various measures to form a joint force for the prevention and control of risks in the bond market.
Firstly, SZSE improved the risk management system. SZSE issued the Guidelines on Credit Risk Management over the Duration of Asset-backed Securities (Trial), clarifying the risk management responsibilities of market participants and establishing regular and irregular risk screening and reporting systems.
Secondly, SZSE took several regulatory measures. SZSE took regulatory measures in time for irregularities such as untimely disclosure of information, misappropriation of funds raised, failure to collect cash flow on time, and negligence in fulfilling credit risk management obligations. Recently, SZSE issued a disciplinary notice to five bond issuers and their main responsible persons.
Thirdly, SZSE increased investment in IT-based supervision. Relying on the bond risk monitoring information system and based on information such as announcement, transactions, public opinions, reporting and market credit risk data, SZSE explored and built a portrait map of issuers and an analysis system of default behavior characteristics, thereby realizing intelligent risk monitoring and supervision by type and improving the ability of risk prediction.
Fourthly, SZSE strengthened joint on-site inspections. Since last year, SZSE has participated in the on-site inspection projects of more than 20 issuers and brokers organized by the securities regulatory administrations of Beijing, Tianjin, Shandong and other locations. Through the effective combination of on-site and off-site inspections, SZSE has explored the ways to form an efficient and smooth cooperative supervision mechanism to produce regulatory synergy.
Taking multiple measures to promote the healthy development of bond market
Faced with the first peak of redemption after the reform of the corporate bond system, SZSE attached great importance to the prevention and control of bond credit risk, promoted the reform and innovation of the bond market, optimized the basic trading system, enriched the types of basic products, and advanced the development of mechanisms and systems suitable for the situation of market risk prevention and control in a market-oriented and law-based manner.
Firstly, SZSE improved the continuous financing system of corporate bonds. Based on the changes in external financing environment and refinancing ability of issuers specially mentioned in annual report review, SZSE established a special auditing mechanism for issuers with business prospects and in normal operation but exposed to short-term liquidity risk, with the purpose of improving the efficiency of refinancing review, and enhancing the rolling and continuous direct financing function of bonds based on the solvency of companies.
Secondly, SZSE supported the issuance of special relief bonds. Since the first public offering of relief bonds "18 Shenzhen Bailout 01" in the market, six special bailout bonds have been issued at a total amount of RMB8 billion. Through the amplification effect of the relief funds, private enterprises with business prospects but facing temporary operational difficulties have been supported to relieve their difficulties.
Thirdly, SZSE provided credit-enhancing support tools for private enterprises to issue bonds. SZSE has actively promoted the implementation of credit protection instruments and bond financing support instruments for private enterprises. It has concluded 20 credit protection contract transactions with a total contract value of RMB280 million, leveraging a bond financing of RMB3.7 billion for private enterprises, further improving the structure of investors in the bond market and the financing efficiency of enterprises.
Fourthly, SZSE improved the risk management system. SZSE has successively launched the fixed income product put revocation, dynamic adjustment of public bond trading mechanism and the transfer of specific bonds in default, encouraging investors to safeguard their rights and interests after bond default through civil litigation and arbitration, improving the judicial relief system for bond default, and promoting the market-oriented and law-based disposition of risks.
