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The Shanghai Stock Exchange (SSE) issued the "Notice of Amending SSE Corporate Bonds Listing Rules" and the "Notice of Amending Issuance, Listing and Trading of Corporate Bonds" on November 2, 2009, which were specially formulated in concert with the classified management of issuance, listing and trading of the corporate bonds. Reporter from the Shanghai Securities News has recently interviewed relevant official, who explained some questions and issues concerning the classified management of the corporate bonds.
Q: What is the classified management of the corporate bonds?
A: Classified management refers to the SSE's differentiated management of corporate bonds meeting its listing conditions in terms of the investors scope and trading platform in the bonds' issuance, listing and trading according to the differences in specific bond credit rating and other indicators. The specific method is as follows: the bonds meeting all the conditions of the classification standard will not be restricted in the issuance and trading objects and could be simultaneously traded through the auction trading system, the block trading system and the comprehensive electronic platform of fixed income securities (fixed income platform) of the SSE after the listing. The bonds failing to meet all the conditions of the classification standard can only be issued to the institutional investors and can not be issued to the individual investors. They can only be traded on the SSE's fixed income platform after the listing.
Q: What is the specific standard for the classified management of the corporate bonds?
A: The specific standard is as follows:
(1) the facility rating of the issuer is not lower than AA;
(2) the net assets of the issuer at the end of the recent period before the bonds listing is not lower than RMB1.5 billion;
(3) the average distributable profit per annum of the issuer realized in the recent 3 accounting years before the bonds listing is not less than 150% of the one-year interest of the bonds; and
(4) other conditions required by the SSE.
The aforesaid conditions must be met at the same time. The SSE may adjust the listing conditions and classification standard of the bonds according to the market situation.
Q: What are the standards for relevant accounting indicators in the classification standard of corporate bonds?
A: Regarding the standards for such accounting indicators as the "net assets" and "distributable profit" in the classification standard of corporate bonds, they refer to the "shareholders' equity" and "net profit" "belonging to owners of parent company in the consolidated statement excluding minority interests".
Q: Which rules will be adjusted due to the classified management of the corporate bonds? What are the specific adjustments?
A: Following the classified management of the corporate bonds, relevant regulations in the "SSE Corporate Bonds Listing Rules" and the "Notice of Issuance, Listing and Trading of Corporate Bonds" will be amended and adjusted. The specific adjustments are as follows:
In Chapter I "General Provisions" and Chapter II "Bond Listing Requirements" of the "SSE Corporate Bonds Listing Rules", Articles 1.5, 2.2 and 2.3 have been added to specify the regulation that "the SSE shall conduct the classified management of listing and trading towards the bonds which meet the listing conditions according to the credit rating and other indicators", and also to specify such clauses as the "specific classification standard" and the "arrangement of the trading platform after the classification".
In the "Notice of Issuance, Listing and Trading of Corporate Bonds", adjustments have been made to such chapters as the "Issuance and Listing of Corporate Bonds" and the "Spot Trading of Corporate Bonds" according to the classification standard and trading platform arrangement.
Q: How will the classified management affect the issuance and listing of corporate bonds?
A: After the classified management is implemented, the corporate bonds failing to meet the classification standard will be restricted in the scope of issuance objects. According to the regulations, such bonds can only be issued to the institutional investors and can not be issued to the individual investors. This may affect the bond issuance to a certain extent. What's more, the scope of trading objects for such bonds will be restricted to the institutional investors on the SSE's fixed income platform.
Current participants in the SSE's fixed income platform are 154 institutional investors recognized by the bourse, such as the securities dealers, fund companies, insurance institutions, finance companies, trust companies and postal savings banks, almost covering the issuance scope of the corporate bonds. But the limited number of participants at the moment may affect the liquidity of the corporate bonds traded on the fixed income platform to a certain extent. The SSE plans to improve the market liquidity by further increasing the number of the traders of the platform.
As for the bonds meeting the classification standard, the issuance and trading objects will face no restrictions, just the same as the situation before the classified management is adopted.
Q: What is the reason for the classified management of the corporate bonds?
A: Classified management of the corporate bonds, not created by us, is a common practice in the international mature markets. Since the pilot issuance of the corporate bonds was launched in September 2007, some debenture bonds also emerged in the market. According to our follow-up analysis and investigation on the debenture bonds, under the backdrop of low bank interest rate, limited investment channels, unreasonable investment habits and insufficient bond investment knowledge in China, some individual investors blindly pursue high earning rate in the bond investment and overlook the hidden enterprise credit risks. Their acts bring about pressure and challenge to the stability and risk control of the corporate bonds market.
To steer the corporate bonds market to a stable, sustainable and healthy track from the very beginning and effectively control the debenture bond risks, we hold that, on the emerging and transitional capital market, particularly by drawing lesson from the US subprime mortgage crisis, it is necessary to set up a standard for our corporate bonds market. We will adopt the classified management as well as differentiated issuance and trading mechanism according to different bond credit ratings to prevent the debenture bond risks from spreading to the individual investors.
Q: How will the SSE deal with the listed bonds?
A: For the listed corporate bonds (including enterprise bonds) failing to meet the classified standard for now, the SSE will adopt the method of "dividing the old from the new", namely, the bonds listed before the implementation of the classified management measures will not be retroactively adjusted. Such bonds can still be simultaneously traded through the auction trading system, the block trading system and the fixed income platform of the SSE.
Q: How will the SSE conduct the dynamic management?
A: For the bonds listed after the implementation of the classified management of the corporate bonds, if they no longer satisfy the classified trading standard due to the rise or fall of bond credit rating or such financial indicators as the net assets, the scope of bond investors and trading platform will be accordingly adjusted, which is the dynamic management. The SSE will study and formulate specific management measures and make an announcement once the measures are ready.
Q: Will the qualifications for collateralized repo of the bonds change after the classified management?
A: No. Corporate bonds that meet one of the following conditions can still be the pledged bonds of the collateralized repo: (1) the issuer of the corporate bonds is a solely state-owned enterprise directly under the Central Government; (2) one of the following banks – Industrial and Commercial Bank of China Limited, Bank of China Limited, China Construction Bank Co., Ltd., Agricultural Bank of China Co., Ltd., Bank of Communications Co., Ltd. and China Development Bank – provides the unconditional and irrevocable guarantee with joint and several liabilities in full amount or the guarantee by mortgaging assets in full amount for the corporate bonds; (3) both the corporate credit rating and the bond credit rating are above AA level (inclusive); or (4) other corporate bonds approved by the China Securities Regulatory Commission.
For the enterprise bonds approved by relevant departments of the State Council and the bonds out of the detachable convertible bonds, the qualifications for collateralized repo will be in accordance with relevant regulations of the corporate bonds.
Q: Will the classified management implemented on the enterprise bonds?
A: Classified management will be implemented towards the enterprise bonds approved by relevant departments of the State Council with reference to the classified management measures for the corporate bonds.
Q: When will the implementation of the classified management of the enterprise bonds start?
A: The classified management measures for the corporate bonds will be implemented from the day when the SSE's notice is published. For the corporate bonds and enterprise bonds with the issuance and listing applications submitted to the SSE before the implementation of the measures, the listing and trading standards will be executed according to the original regulations.
