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In order to implement the decisions and arrangements of the Party Central Committee and the State Council for broadening the financing channels for private enterprises and helping the companies out of the financing difficulty in a market-oriented way, the Shanghai Stock Exchange (SSE) recently launched the pilot program of credit protection certificates on the basis of the earlier pilot program of credit protection contracts and the approval of the China Securities Regulatory Commission (CSRC). On December 17, 2019, the first batch of credit protection certificates was launched, with a total nominal principal of RMB133 million for 4 products, effectively supporting RMB4.46 billion of bond financing.
The first batch of 4 products of credit protection certificates was issued by Haitong Securities, China Securities, CITIC Securities and Huatai Securities respectively. Among the referenced entities, Shenzhen Baiyeyuan Investment Co., Ltd. and the initiator of the 2019 first asset-backed special program of Haier Leasing are private companies, with the protected debts covering corporate bonds such as bonds of private company and poverty alleviation bonds as well as asset-backed securities. The four founding institutions provide the issuers with credit protection through market-based credit enhancement tools, and offer the enterprises a comprehensive financing solution of "bond financing + credit protection certificate", which improves market confidence and issuance efficiency, and makes the issuers’ implementation of bond financing more smooth. At the same time, as the manager of the 2019 Ping An Leasing auto financing the third asset-backed special program, Guotai Junan Securities will issue the credit protection certificates for the special program in the near future to support its successful issuance.
The first batch of credit protection certificates has effectively bolstered the bond financing of private enterprises, micro, small and medium-sized enterprises, etc. through credit enhancement, and the social effects are encouraging. For example, the funds raised from the special corporate bonds for poverty alleviation in Lankao County were used for the local resettlement housing construction project of Mengzeyuan Community. Haitong Securities sold credit protection certificates with a nominal principal of RMB43 million to investors in poverty alleviation bonds, thus supporting the issuance of RMB1 billion of bonds during the same period, and the move reduced the financing costs for the companies, provided the enterprises with project construction funds, and promoted the construction of local livelihood projects, so as to improve the living conditions of local people. For another example, the project of the 2019 first asset-backed special program of Haier Leasing corresponds to nearly 70 micro, small and medium-sized enterprises as financiers, with a single volume of financing less than RMB60 million. Huatai Securities sold the credit protection certificates with a total nominal principal of RMB30 million to the 19 Haier Leasing ABS Priority Subscription Institutions to provide them with credit enhancement support, thus effectively backing a securities issuance size of RMB960 million, and the move pushed the firms to provide financing and leasing services for micro, small and medium-sized enterprises and facilitate financing of micro, small and medium-sized companies.
The steady launch of the pilot program of credit protection certificates is an important measure for the SSE to develop the credit enhancement tools and promote financing of private enterprises under the guidance of the CSRC. In November 2018, according to the unified deployment of the CSRC, the SSE initiated the pilot program of credit protection contracts, which has been advanced in a smooth and orderly manner and has played an important role in supporting the private enterprises in financing. So far, a total of 23 institutions have become the core dealers of the credit protection contracts on the SSE, and a total of 37 credit protection contracts have been concluded with a total nominal principal of RMB2.27 billion, effectively supporting 18 entities in a total bond financing of RMB12.54 billion. In order to further enhance the ability of the exchange-traded bond market to serve the real economy, improve the risk pricing mechanism of the credit bond market, and strengthen the function of disclosure of credit risks, the CSRC approved the SSE’s launch of pilot business of credit protection certificate, based on the sound operation of the credit protection contracts in the earlier period. The exchange credit protection certificates refer to the tradable and negotiable financial instrument issued by the institutions to provide protection against credit risks for the holders of the certificates in terms of the referenced entities or debts. The certificates have the following characteristics. First of all, the pricing method is more market-oriented, as the creation is mainly conducted in the highly market-based forms such as bookkeeping and filing; secondly, the elements are standardized and the certificates can be transferred and circulated through non-public means; thirdly, the investors can participate easily, as the investors do not need to sign the master agreement when the conditions for investor suitability are met, resulting in the expansion of coverage; fourthly, the business is highly transparent as there are strict requirements for information disclosure in the duration of the credit protection certificates.
Going forward, under the unified leadership of the CSRC, the SSE will further improve the relevant technical systems of credit protection instruments, support and encourage the participation of more qualified financial institutions in the business of credit protection tools through market services and business training, alleviate the difficulty in financing for private enterprises and micro, small and medium-sized companies by market-based means, and enhance the capacity of the exchange-traded bond market for serving the real economy.
