Q&A on Disclosure of 2019 Annual Reports of Corporate Bonds and Asset-backed Securities

10 Jul 2020

Recently, an official of the Shanghai Stock Exchange (SSE) in charge of relevant businesses answered questions on the disclosure of the 2019 annual reports of corporate bonds and asset-backed securities as well as related regulatory affairs.

Q1:Can you brief us on the overall disclosure of the 2019 annual reports of corporate bonds and asset-backed securities?

A: At present, the disclosure of the 2019 annual reports of corporate bonds and asset-backed securities has been basically completed. Due to the impact of the epidemic this year, some market players found it difficult to complete the audit work by April 30. According to the unified deployment of the China Securities Regulatory Commission (CSRC), the SSE issued a notice on the market in advance to announce that the bond issuers and relevant market entities finding it impossible to complete the audit work on schedule due to the pandemic can postpone the disclosure of the annual report until June 30. According to the actual disclosure, most of the market entities managed to overcome the difficulties and completed the disclosure of the annual report before the original deadline. As of June 30, 97.50% of corporate bond issuers and 98.75% of the asset-backed special programs finished the disclosure, and more than 80% of them disclosed their annual reports before April 30, showing that the disclosure process was smooth on the whole.

In terms of the disclosure quality, the disclosure of the annual reports of corporate bonds and asset-backed securities has been further improved in quality this year. The vast majority of disclosure obligators were able to skillfully fill in the annual report with the XBRL (Extensible Business Reporting Language) technical template, and the annual reports were more compliant and accurate. In addition, the disclosed content of the annual reports focused more on the information useful for investors to make value judgments and investment decisions. The annual reports of corporate bonds focus on the key issues related to the solvency of the bond issuers, including asset restrictions, cash flow fluctuations, debt structure and short-term debt repayment pressure, etc.; the content of the annual reports of asset-backed securities emphasizes the operations of the underlying assets, such as major changes in the operation of the underlying assets, cash flow generation and collection, etc., fully highlighting the attribute of asset credit for asset-backed securities.

Q2: What are the main features of the 2019 annual reports of corporate bonds and asset-backed securities?

A: According to the disclosure, the 2019 financial data of the corporate bond issuers and the asset-backed securities were generally stable, and the overall operation and the credit status were sound.

The corporate bond issuers operated well on the whole in 2019, as investment and financing activities were vigorous, and the financial leverage remained stable. First, the operating performance generally improved, and the operating cash flow grew. In 2019, against the general background of higher economic downward pressure at home and abroad, the corporate bond issuers achieved eye-catching operating performance. Throughout the year, the issuers recorded a total operating income of RMB48.97 trillion, an increase of 9.73% year-on-year; the net profit amounted to RMB2.57 trillion, up by 9.62% year-on-year; the net cash flow from operating activities stood at RMB3.91 trillion, an increase of 5.93% from a year earlier. The net profits of various industries expanded to varying degrees, and the net profit growth rates of the issuers in mining and transportation exceeded 10% year-on-year. Second, investment and financing activities increased significantly, and the level of leverage and the debt maturities were basically stable. Due to the growing profits and the improvement in business conditions, the issuers were active in investment and financing in 2019, as the net cash outflow from investment activities for the year reached RMB6.90 trillion, an increase of 14.22% over the previous year; the net cash inflow from financing activities totaled RMB3.24 trillion, an increase of 10.61% from a year earlier. At the same time, the issuers' leverage level and debt maturity structure remained basically steady, as at the end of the year, the issuers' average asset-liability ratio was 60.54%, an increase of 0.73 percentage point year-on-year; on average the short-term interest-bearing debt accounted for 34.03% of the total interest-bearing debt, a decrease of 0.11 percentage point year-on-year, showing that the financing strategy was generally prudent.

The asset-backed special programs ran smoothly in 2019, and the quality of the underlying assets was further improved. First, the operation of the special programs was relatively steady. The cash flow of the vast majority of underlying assets met expectations. The asset service institutions performed their duties as agreed in the collection and transfer. The business and financial conditions of the initial stakeholders and other business participants were generally solid. The credit enhancement measures were effectively carried out during the reporting period. The arrangements for risk mitigation in all aspects of the trading structure were well implemented. Second, the performance of major categories of underlying assets was in line with expectations, and the asset credit was further enhanced. The cash flow of the assets of receivables was stable, and the debtors' credit performance records were sound. The diversification of the pooled assets in financial leasing was further expanded, and the share of the top five cash flow providers dropped to 27.77%. Relying on powerful online platforms, the assets in consumer finance saw the debtors highly dispersed, and the indicators such as overdue rate and default rate remained steady. The cash flow fluctuations of the underlying assets of usufruct were basically consistent with the forecast, and the collection rate of the underlying assets of 93% of the programs was above 80%. The location advantage of the real estate assets was remarkable, as the average occupancy rate of property was more than 92%, and 93% of the properties saw the rents remain stable or rise slightly.

Q3: What were the main guidelines and features in the regulation of annual reports of corporate bonds and asset-backed securities on the SSE this year?

A: In the special situation of the epidemic this year, fully considering the impact of the pandemic, the SSE adjusted the regulatory requirements and modes in a timely manner in the regulation of the annual reports. At the same time, based on the information disclosure regulation to enhance the effectiveness of investor protection, the SSE further strengthened the relevance of information disclosure and its role in risk unveiling with the orientation toward risks and problems.

First of all, the regulation was more flexible and the regulation modes were improved according to the specific circumstances. Taking into account the impact of the epidemic, the SSE issued a notice to the market in advance this year, requiring the market participants such as corporate bond issuers to strive to overcome difficulties and disclose annual reports on time, and also making arrangements and specific requirements for the deferred disclosure when the disclosure on schedule was actually impossible. In the process of supervising the annual report, the SSE reasonably adjusted the corresponding regulation modes according to the specific reasons and circumstances for the postponement. On the one hand, for the disclosers that did meet the conditions for deferred disclosure, the postponed disclosure of annual report would be approved, and at the same time, they would be urged to disclose the annual report as soon as possible to fully protect the rights and interests of investors; on the other hand, in the circumstances where the audit agency failed to issue an opinion or the reason for the delay was insufficient, the SSE would strictly require relevant entities to disclose the annual report on schedule, and at the same time make effective efforts in in-process and ex post regulation, so as to stringently prevent arbitrary extensions.

Second, according to the industrial characteristics, the SSE focused on the disclosure of the information on the matters that had a significant impact on bond repayment and investor rights. In the review of annual reports of corporate bonds this year, besides the funds outstanding for non-business transactions, restricted assets, external guarantees and other conventional concerns, the SSE paid special attention to the sustainability of business operations, the stability of cash flow and the long-term and short-term debt paying abilities for the bond issuers, requiring the issuers to make detailed analysis and disclosure of major changes or significant fluctuations in related matters or data. In addition, for the relevant issuers in the commerce, logistics, export and other industries that were severely affected by the epidemic, the SSE focused on the impact of the pandemic on future business operations and cash flow, urging the issuers to make supplementary disclosure of major post-event matters and countermeasures.

Third, the SSE reasonably extended the regulation to tighten the supervision over the information disclosure and compliance of the institutions involved in asset-backed securities. In the review of the annual reports of asset-backed securities, in addition to paying attention to the operation of the asset-backed special programs themselves, the SSE also strengthened the supervision over the information disclosure of initial stakeholders and other relevant institutions. Especially for the special programs with underlying assets in the categories of usufruct and real estate, which have long asset recovery cycles and high dependence of cash flow on the continuous operation of relevant entities, the SSE focused on the credit status of the relevant initial stakeholders, and intensified the supervision on disclosure of key issues such as overdue debt and debt repayment pressure. In addition, the SSE strengthened the monitoring of the institutions involved in the special programs in terms of operation and performance of duties. For the asset service agencies that had the circumstances such as failing to collect the cash flows of the underlying assets in a timely manner, the SSE required them to make corrections within a time limit, and urged the business participants to strictly implement asset isolation so as to prevent the risk of mingling.

Fourth, the SSE further integrated information disclosure regulation and risk management. In the review this year, the SSE focused on the relevant annual reports of bonds and asset-backed securities that are subject to intensive redemption of principal during the year. For the issuers of corporate bonds that are to pay the principal in the near future, the SSE paid special attention to the company's own business sustainability, the size and structure of interest-bearing debts and external financing capabilities, and urged the issuers to prepare early and properly make arrangements for debt service. For the asset-backed special programs facing income distribution in the near future, on the basis of the characteristics of relevant underlying assets, the SSE was especially concerned about the operation of the underlying assets and the core operating indicators, made targeted inquiries about the discovered cases where the actual cash flow fell significantly lower than the predicted value, and urged the relevant credit enhancement institutions to fulfill credit enhancement obligations as agreed when the credit enhancement mechanism was triggered.

Q4:Are there any other arrangements of the SSE in the supervision of information disclosure?

A: The SSE will continue to make effective efforts in the regular supervision of information disclosure for corporate bonds and asset-backed securities. In the near future, the SSE will urge the relevant entities that failed to disclose the annual report before June 30 to complete the task, take self-regulatory measures as appropriate, and make arrangements for the preparation for and supervision of the disclosure of the 2020 semi-annual reports of corporate bonds.

Going forward, the SSE will continue to improve the self-regulatory system for information disclosure for the purpose of risk management and investor protection, and introduce heavier penalties for violations. At present, the SSE is in the process of revising the self-regulatory rules such as the Rules for Listing of Corporate Bondsand the Rules for Listing and Transfer of Non-publicly Offered Corporate Bonds in accordance with the newly amended Securities Law, and will further improve the self-regulatory rules for periodic reports and interim reports according to relevant laws, regulations and rules. The SSE will continuously enhance the role of information disclosure in risk disclosure, and improve the rule system and regulatory mechanism for information disclosure that are compatible with the risk characteristics of bonds.