October 25, 2018 / 9:14 AM / 21 days ago

China's Rongsheng embraces hedging tool as Beijing supports bond issuance

SHANGHAI, Oct 25 (Reuters) - Zhejiang Rongsheng Holding Group has become the first Chinese private company this year to issue bonds with the help of a type of credit risk management tool, its underwriter said on Thursday, as Beijing steps up efforts to aid cash-strapped non-state-owned businesses.

The announcement by China Zheshang Bank, which helped Rongsheng, the Chinese petrochemical firm raise 1 billion yuan ($143.93 million) via debt issuance, came a day after central bank governor Yi Gang vowed to create a sound funding environment for the private sector.

China’s small- and medium-sized enterprises are suffering from liquidity stress as the economy slows amid Beijing’s deleveraging campaign and the Sino-U.S. trade war. Liquidity has almost dried up in the corporate bond market for private issuers.

In a statement on Thursday, Zheshang Bank said it is using Credit Risk Mitigation Warrants (CRMWs), to help reduce funding costs for Rongsheng. It said CRMWs are effective for easing liquidity difficulties at some private firms.

Created by China Bond Insurance Co, CRMWs - the Chinese version of Credit Default Swaps (CDS) in the U.S. - allow bond investors to hedge against default risks.

Shen Bin, head of Zheshang Bank’s investment banking business, said in a statement that CRMWs would help to establish a better mechanism to manage credit risk, and that the bank will promote their use to aid private firms with funding difficulties.

However, some analysts caution that government intervention in China’s bond market will hamper the development of a sound market for credit-hedging tools.

The 270-day bonds issued by Rongsheng were 2.67 times over-subscribed, and sold at annual interest rate of 5.22 percent, lower than an identical batch of bonds the company issued simultaneously without the hedging tool. This showed CRMW helped reduce the company’s funding cost, Zheshang Bank said.

$1 = 6.9476 Chinese yuan Reporting by Samuel Shen and Andrew Galbraith Editing by Shri Navaratnam

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