Why do bond market default occur frequently under the broad credit pattern?

category:Finance
 Why do bond market default occur frequently under the broad credit pattern?


Looking back to 2019, the credit default of Chinas bond market presents the following characteristics:

First, the subject of breach of contract spreads from low qualification to high qualification. In 2019, the primary rating center of default subjects moved up, and the number of default and the proportion of bond related scale of AAA and AA + enterprises significantly increased. At the time of issuance, there were 12 defaulting enterprises with AAA and AA + rating, an increase of 5 compared with 2018, accounting for 8% to 23%; the scale of securities involved increased by 14.4 billion to 57.5 billion compared with 2018, accounting for 14% to 51% (see Table 1). At the same time, the number of defaults and the scale of securities involved of listed companies also increased compared with the previous year. There are 23 defaulting listed companies, an increase of 8 over the previous year; the scale of securities involved is 30.8 billion yuan, an increase of about 1.2 billion yuan over the previous year.

Data source: wind. Eliminate duplicate statistics

Secondly, the main body of breach of contract is widely distributed. From a regional perspective, the region of bond default in 2019 covers 21 provinces (municipalities directly under the central government). The top five regions with the largest number of defaulted bonds are Beijing, Jiangsu, Shandong, Zhejiang and Anhui. The total amount of defaulted bonds is 67.8 billion yuan, but considering the base factors such as issuance scale, the actual default rate is not high. From the perspective of industry, according to the wind level I industry classification, only the health care industry and telecommunication service industry in 11 industries did not default, and the industry was highly fragmented. The number of enterprises in breach of contract and the scale of securities involved ranked first respectively in industry, material industry and optional consumption industry, with 15, 8 and 12 enterprises respectively, and the scale of securities involved was 46.4 billion yuan, 19.9 billion yuan and 12.8 billion yuan respectively.

Third, private enterprises are still the disaster area of default. In 2019, the central government and regulatory agencies launched a series of policy combinations, including the central banks targeted reduction of standards, reform of LPR quotation mechanism, reduction of MLF and reverse repo operating interest rates, creation of crmw, establishment of inclusive small and micro enterprise credit support rigid indicators, etc., aimed at solving the financing difficulties and financing difficulties of small and medium-sized enterprises. However, the default risk of private enterprises has not been substantially improved in 2019. In 2019, the scale of default bonds of private enterprises was 81 billion yuan, 5.5 billion yuan less than that of the previous year. However, there are 40 non defaulting private enterprises (including 17 Listed Companies), an increase of 6 over the previous year, and 25 new non defaulting private enterprises, accounting for 73% of the new defaulting entities.

2u3001 Changes of default environment and formation mechanism in 2019

uff081uff09 Significant improvement in credit environment

In 2018, under the background of deleveraging and strong supervision, the market liquidity is tight, the refinancing ability of enterprises is limited, and bond default events are concentrated. In 2019, thanks to the loosening of monetary policy, the capital area has improved significantly. The 7-day repo rate center of the whole market has moved down 35bp to 2.67% compared with 2018. The policy continues to make efforts to unblock the transmission of monetary policy, reduce the financing cost of the real economy, and gradually realize the wide credit effect.

From the perspective of new financing, in 2018, the scale of new social financing rapidly contracted, and the scale of credit debt default increased. (in order to smooth the short-term disturbance caused by single month fluctuation, this paper takes 12 months as the cycle to roll the data.) The liquidity in 2019 is significantly more abundant than that in 2018. The central bank has repeatedly lowered the MLF and open market operating interest rates and guided the LPR downward. Since January 2019, the two indicators of social financing scale and social financing scale excluding special bonds of local governments have bottomed out and recovered. In April, the default scale began to stabilize and show a downward trend (see Figure 2). It is worth noting that the negative relationship between new non-standard financing scale and bond default scale is more significant (see Figure 3). In 2019, the overall financial supervision was relaxed, the pressure drop of trust loans and entrusted loans slowed down compared with 2018, and the risk of non-standard off balance sheet financing disruption was reduced, further easing the short-term liquidity pressure of enterprises.

Data source: wind. In December 2019, the social finance standard included national debt and local general debt, so the data in December was excluded.

In the environment of abundant external liquidity, the formation mechanism and trigger factors of bond default in 2019 have also changed significantly. From the perspective of securities, the default scale of short-term financing and ultra short-term financing in 2019 decreased from 29.3 billion yuan in 2018 to 14.6 billion yuan, while the proportion of medium-term bill default increased significantly, indicating that the credit risk caused by liquidity tension has eased (see Figure 4).

In addition to external factors such as macro-economic downturn and industry downturn, the internal operation and management defects of enterprises have gradually evolved into an important reason for the default of issuers in 2019 (see Figure 5). In 2019, the corporate governance problems of new defaulters are mainly reflected in the following aspects:

(1) Equity disputes or excessive power of the actual controller, such as founder of Peking University and Guoan group;

(2) The radical expansion of the company and the rising financial pressure lead to the breaking of the capital chain, such as Sanyou group, Jinggong group and Zhongmin investment;

(3) Cross default caused by external guarantee and mutual guarantee, such as Xiwang Group;

(4) Information Disclosure Violation, suspected of financial fraud, such as kangdexin and Dongxu photoelectric. The weakness of internal control of enterprises is often reflected in all aspects of operation and management, so there are many corporate governance problems in the default subject.

Corporate governance problems often have a long history of disadvantages and strong concealment. Once exposed, corporate qualification will deteriorate rapidly, which is easy to cause market fluctuations. However, the credit default caused by corporate governance problems did not occur in 2016-2018, which is the most severe deleveraging year, but broke out in the current environment of relaxed financial conditions, which also proves that the financing environment is not the most direct reason for the high default rate in 2019, and the micro characteristics and endogenous risks of the default subject cannot be ignored.

Data source: wind. Note: one or more corporate governance problems exist in the same defaulting entity.

uff082uff09 Credit differentiation is obvious, weak qualification subject faces financing dilemma

In 2019, the financing of private enterprises will face difficulties in both quantity and price, and the phenomenon of state advance and people retreat is obvious. In terms of volume, the net financing amount of private enterprise bond market in 2019 is - 84.2 billion yuan, with 8 months of negative net financing amount. In the same period, the net financing volume of the state-owned enterprise bond market was 3.02 trillion yuan, with a wide gap between the two (see Figure 6). From the perspective of price, the credit spread of private enterprises has risen rapidly since 2018, and remained at a high level near 300bp until the end of 2019. However, the credit spreads of central and local state-owned enterprises were narrowed, with 21bp, 41bp to 71bp and 101bp narrowed respectively in 2019 (see Figure 7). With the support of a series of private enterprise rescue policies in 2019, the fund availability of private enterprises is still far lower than that of state-owned enterprises, and the financing function of its bond market has not been restored.

Data source: wind

Why in this round of broad credit, private enterprises are not blood transfusion but blood drawn?

The subcontractor event in the second quarter of 2019 marks the break of the financial industry in China, and it is also an important turning point of market risk preference in 2019. After the contractor event, the liquidity stratification of the banking system has intensified. In the past, small and medium-sized banks were the main force to support the financing of small and medium-sized enterprises. Now, the pressure on the liability side has increased sharply, which will inevitably drag down the credit supply and hinder the refinancing channels of private enterprises. Since May 2019, the year-on-year growth rate of loans of small and medium-sized banks across the country has continued to decline, while the growth rate of loans of large banks has gradually picked up steadily (see Figure 8). Along with the weak balance sheet expansion of small and medium-sized financial institutions, the credit stratification of financial institutions has spread to the real economy, and the financial conditions faced by low qualified Issuers (especially private enterprises) have worsened. Corresponding to this is the precipitous decline in the growth rate of private investment in 2019, forming a vicious circle of decline in the growth rate of private enterprise investment - deterioration in the credit fundamentals of private enterprises - decline in external financing ability (see Figure 9).

Data source: wind

After the contractor incident, the risk preference of various financial institutions was slowly repaired, while the state-owned enterprises and urban investment enterprises with better qualifications became the biggest beneficiaries of this round of broad credit, and the financial conditions were significantly improved. In June 2019, after the issuance of GBH No. 40 (opinions on preventing and resolving the risks of local governments implicit debts due from financing platform companies), the replacement of local governments implicit debts accelerated. In order to maintain the cooperation between local governments and other considerations, commercial banks actively participate in the work of solving implicit debts, mainly by means of loan extension within the scope of implicit debts, some non-standard loans are converted into long-term limited loans, and the replacement loan interest rate is also reduced. With the support of policies, the financing of urban investment bonds has also been significantly restored. In 2019, the issuance of urban investment bonds reached 3.4 trillion yuan, with a net financing amount of 1.2 trillion yuan, accounting for 34% of the net financing of credit bonds of non-financial enterprises. The massive issuance of local government bonds in 2019 also has a crowding out effect on the allocation of non-financial enterprise credit bonds by financial institutions. Data from the central bank shows that by the end of 2019, the trust balance of Chinas bond market was 99.1 trillion yuan, of which the trust balance of local government bonds was 21.8 trillion yuan, accounting for more than 20%.

uff083uff09 Recessive guarantee weakens, and major beliefs gradually disintegrate

Since 2019, the default risk of state-owned enterprises, urban investment and large private enterprises has increased significantly, and the credit risk has gradually spread to the high-quality assets sought by the market, which has a great impact on the sentiment and confidence of bond market investors. State owned enterprises such as Qinghai Salt Lake, Tianjin Haotong property, Shenyang Machine Tool Group, Peking University Founder defaulted on their bonds, and their beliefs were frequently subverted; 16 call and economic development ppn001 sale back payment delay event also led to the city investment belief shaking again. In addition, in 2019, five large private enterprises with assets of more than 40 billion yuan defaulted (see Table 2).

Data source: wind, eliminate duplicate data. Note: CIC only disclosed the financial data of the third quarter of 2018.

As the state-owned enterprises and urban investment debt just broke faith, the credit between such enterprises and the government is gradually being cut off. The market has also gradually recognized that the government will not seek for bottom line relief for all debts. The weakening and invalidation of implicit guarantee is the general trend. The governments support will eventually ebb. In the future, the solvency of state-owned enterprises and urban investment enterprises will rely more on their own hematopoiesis and refinancing capabilities.

3u3001 Future prospects

In 2020, the stable growth policy signal will be strengthened, and the liquidity environment will probably continue to be loose. At the policy level, the support for private enterprise rescue has continued to increase. The State Council issued the opinions on building a better development environment to support the reform and development of private enterprises, which has broken the institutional and institutional barriers to the high-quality development of private enterprises. The regulatory authorities have taken active measures to remedy the institutional weaknesses, improve the market-oriented and legal bond default disposal mechanism, and enrich the market-oriented default disposal means u3002 If all policies and measures can be effectively coordinated and implemented, the structural differentiation of broad credit will be improved marginally, and the difficulties faced by private enterprises financing are expected to be alleviated.

How will credit risk evolve in the future? In the short term, affected by the epidemic of new crown pneumonia, the production and operation activities of all kinds of enterprises slow down, and the credit fundamentals of enterprises will probably weaken in the short term. In addition, under the impact of the epidemic, the market risk preference will fall significantly, the allocation of investors assets will continue to favor interest rate debt, high-quality central enterprises and state-owned enterprises, and the pattern of credit differentiation will be further intensified. In addition, the impact of the contractor event is far-reaching, and the trend of risk exposure and market-oriented disposal of small and medium-sized financial institutions in the future has not been changed. However, in the pattern of the gradual collapse of major beliefs, investors risk preference and market confidence in private enterprises need to be repaired. In the long run, the transformation of economic structure and industrial structure has a long way to go, which also means that the pattern of local social credit contraction will exist for a long time. Although the financing of private enterprises is facing a severe winter, compared with state-owned enterprises and urban investment, private enterprises have higher operating efficiency, lighter historical burden and more flexible transformation. Once the debt boundary between the government and enterprises is completely separated, the market plays a decisive role in resource allocation, the operating and financing environment of private enterprises is expected to be substantially improved, and the chain of broad currency, broad credit and economic recovery will also be true Im through. (Li Siqi is a researcher of a large state-owned commercial bank) source: surging news editor: Yang Zeyu, nf6036

How will credit risk evolve in the future? In the short term, affected by the epidemic of new crown pneumonia, the production and operation activities of all kinds of enterprises slow down, and the credit fundamentals of enterprises will probably weaken in the short term. In addition, under the impact of the epidemic, the market risk preference will fall significantly, the allocation of investors assets will continue to favor interest rate debt, high-quality central enterprises and state-owned enterprises, and the pattern of credit differentiation will be further intensified. In addition, the impact of the contractor event is far-reaching, and the trend of risk exposure and market-oriented disposal of small and medium-sized financial institutions in the future has not been changed. However, in the pattern of the gradual collapse of major beliefs, investors risk preference and market confidence in private enterprises need to be repaired. In the long run, the transformation of economic structure and industrial structure has a long way to go, which also means that the pattern of local social credit contraction will exist for a long time.

Although the financing of private enterprises is facing a severe winter, compared with state-owned enterprises and urban investment, private enterprises have higher operating efficiency, lighter historical burden and more flexible transformation. Once the debt boundary between the government and enterprises is completely separated, the market plays a decisive role in resource allocation, the operating and financing environment of private enterprises is expected to be substantially improved, and the chain of broad currency, broad credit and economic recovery will also be true Im through.

(author Li Siqi is a researcher of a large state-owned commercial bank)