China opens bond market to ChiNext stocks

BEIJING/HONG KONG, Dec 2 (IFR) - China's regulators have stepped up their efforts to promote the bond market as an alternative source of funding for fast-growing smaller companies.

The China Securities Regulatory Commission has opened the door for companies listed on ChiNext, Shenzhen's answer to Nasdaq, to issue bonds through private placements. The move offers a much-needed fundraising channel for the high-tech sector at a time when bank lending remains under heavy scrutiny.

It is the latest sign that China is looking to ease funding pressures for small and medium-sized enterprises, seen as an important engine of future economic growth. The plan, however, will be a test of appetite for lower-rated credits in the country's conservative bond markets.

First to join the queue are Zhejiang Sunflower Light Energy Science & Technology and Leshi Internet Information & Technology. The two ChiNext-listed companies announced plans to raise Rmb600m (USD94.1m) and Rmb400m, respectively, through private bonds on November 26, just a week after the CSRC announced the new rules on November 18.

Sunflower's proposed bonds will come with a tenor of not more than five years, while Leshi Internet is targeting a three-year maturity.

The CSRC's announcement has been welcomed by ChiNext issuers as a new fundraising channel for the companies that are not allowed to raise funds through share placements.

However, market participants warned the immediate impact was likely to be muted. The new rules come with strict criteria reducing the number of eligible issuers, while investors have voiced concerns about taking on additional credit risk in an illiquid product.

An issuer must have a good credit rating and sound internal controls, while the regulator must be satisfied that its assets and profits are sufficient for it to repay the debts.

There are also restrictions to limit investors in the private placement market to sophisticated investors who can fully understand the risks involved and have the ability to take up such risks. Each bond can be placed to no more than 10 investors.

Even without those restrictions, investors are wary of the illiquidity and risky nature of bonds from ChiNext issuers.

"It's the private nature that matters. Private means a lack of liquidity. The private MTNs issued by big state-owned companies are not even selling well; I can't think of any investor who will have interest in the ChiNext issuers," said an investment manager.

The relatively low credit quality is another issue. Many bankers believe those issues will be assigned local credit ratings of AA- or single A.

"It will be extremely difficult to sell deals like this," said a senior fixed-income banker. "Insurers just skip low-credit deals, while banks prefer private MTNs. Public funds and securities firms look for liquidity in asset allocations. Private funds and trust companies, who ask for super-high coupons, are likely to be the main buyers of the bonds privately placed by ChiNext issuers."

HIGH YIELDS LIKELY

The fact that ChiNext bonds are not allowed to be publicly traded also means investors will have to hold the bonds to maturity. As such, issuers need to offer a good premium to lure investors into the deals.

"I guess the coupon will be above 10%, otherwise investors would rather choose enterprise bonds that are listed in the interbank market," said the banker.

As a reference, Huayi Brothers Media Corp, a ChiNext issuer with a credit rating of AA-, issued Rmb300m of 366-day commercial paper at 8.00% on November 17. Private ChiNext bonds will be less liquid than the CP market.

To sweeten the offers, some ChiNext issuers are looking for guarantors for their deals, according to a source who is close to a potential ChiNext private bond placement.

Some bond traders suggest that issuers may be able to lure some investors if the shareholders are willing to pledge their shares as collateral.

"After all, ChiNext companies' business models are not a good match for bond buyers' appetites," said a banker.

Banks are also reluctant to fight for a piece of this new business.

"Honestly speaking, not many institutions are interested in underwriting such deals," said a DCM banker, "Issuances by ChiNext companies are too small and you can't make much money out of them. Big banks will definitely not spend much time on it."

Established as recently as October 2009, ChiNext has grown rapidly, with 275 companies listed on its board as of December 1. (Reporting By Carrie Hong and Fiona Lau)