On November 2, 2018, the Shanghai Stock Exchange (SSE) pilot business of market credit protection instrument kicked off, with the first credit protection contracts successfully reached. The business was an important measure taken by the SSE to implement the requirement of the CPC Central Committee and the State Council for supporting the development of private enterprises, and the arrangements of the China Securities Regulatory Commission (CSRC) for exploring the use of mature credit enhancement instruments and helping private enterprises to solve the difficulty in bond issuance, showing that the SSE market is vigorously making explorations in improving the credit risk management. Through the market-oriented credit protection instruments, the SSE tries to steer the market towards restoration of confidence in investing in the bonds of private enterprises, improve the financing environment for private companies, and boost their healthy development.
On the same day, Guotai Junan Securities and CITIC Securities became the first credit protection sellers, and concluded two transactions of credit protection contracts, with the reference entities including private enterprises with different credit ratings, namely, Hongshi Holding Group Co., Ltd. (private enterprise, AAA rating) and JCHX Mining Management Co., Ltd. (listed private company, AA rating). As the respective lead underwriters of the corporate bonds issued recently by the above-mentioned private companies, Guotai Junan Securities and CITIC Securities provided credit protection for their own clients, which is conducive to releasing positive signals to the market, enhancing market confidence and ensuring the smooth issuance of the bonds of private enterprises.
For example, in the credit protection contract reached by Guotai Junan Securities and some product of Zheshang Fund on the basis of Hongshi Holding Group Co., Ltd., the reference entity Hongshi Holding Group Co., Ltd. publicly issued the "2018 Special Poverty Alleviation Corporate Bond Publicly Issued by Hongshi Holding Group Co., Ltd." on the SSE recently, with all the raised funds to be used in the "targeted poverty alleviation project" of Huichang Hongshi Cement Project (The cement production project, located in Xijiang Town, Huichang County, Ganzhou City, Jiangxi Province, is a key county for poverty alleviation-oriented development in the country, and it has effectively created jobs for the local poor people). Guotai Junan Securities is the lead underwriter of the special poverty alleviation corporate bond, and a product of Zheshang Fund successfully subscribed for the special poverty alleviation bond. Guotai Junan Securities has provided Zheshang Fund with the credit protection for the corporate bond issued by Hongshi Holding Group Co., Ltd. on the SSE market. It is learnt that having an expectation in the lead underwriter providing some credit protection for this term of the bond, the investors were active in subscribing, with the total subscription ratio reaching 3.03 times and the issuance coupon rate at 5.5%, which was the bottom level of the bookkeeping interval from 5.5% to 7.0%, and was lower than the overall industry level in the same period. The introduction of the credit protection instrument will help dispel investors' concerns about the credit risk of private enterprises, expand the group of bond investors, improve the success of bond issuance, and reduce the financing cost for the enterprises.
The SSE took the lead to introduce the credit protection instruments and created a new model of securities traders serving the corporate clients, as the securities traders can provide the issuers with comprehensive financing solutions of "corporate bond financing + credit protection instrument". The move will significantly enhance the capacity of the securities underwriting institutions for serving corporate clients, especially the private enterprise clients in bond financing. During the pilot program period, the credit protection instruments will focus on supporting the bond financing of high-quality private enterprises, innovative enterprises and startups in temporary liquidity difficulties; the prices will be determined independently by the financial institutions and the market-based pricing will be implemented.
Going forward, the SSE will formulate the business rules related to the credit protection instruments as soon as possible, so that more qualified market institutions can provide relevant credit protection services and products for the clients, the financing environment for the private enterprises can be improved, and the capacity of the SSE bond market for serving the entity enterprises can be further enhanced.