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Regulators improve the mechanism for bond default treatment

On December 27, the People's Bank of China, together with the Development and Reform Commission and the China Securities Regulatory Commission, drafted the “Notice Concerning the Disposal of Corporate Credit Bond Defaults (Consultation Draft)” (hereinafter referred to as the “Notice”). At the same time, the China Association of Interbank Market Dealers issued three rules, including the "Guidelines on Default and Risk Disposal of Non-financial Debt Financing Instruments of the Interbank Bond Market".

Industry insiders said that the regulatory authorities focused on the company's credit bond default treatment, and responded to a number of hotspots in the market, including increasing efforts to evade waste bonds, improving the pre-default risk prevention and disposal mechanism, and enabling trustees to "Nothing to do" focuses on maintaining rights and improving the efficiency of breach handling.

Filling multiple institutional gaps

Wind data shows that as of December 27, 2019, the total face value of the company's credit bonds was 693.8 billion yuan.

In recent years, with increasing downward pressure on the economy and economic restructuring, risk events and defaults in the bond market have increased.

From the perspective of risk disposal methods, most of the current risk disposal methods are post-default disposals, and the disposal efficiency needs to be improved. If the two parties to the agreement can reach a debt restructuring agreement before the default, raising the risk treatment from default to pre-default will have many benefits in reducing the default rate and reducing investor losses. In addition, improving the efficiency of default disposal will also help protect investors' rights and interests.

This time, the three departments issued a document with the Association of Dealers, which made detailed regulations in relevant aspects. The "Notice" drafted by the Central Bank in cooperation with the Development and Reform Commission and the Securities Regulatory Commission clarified the basic principles for the disposal of defaults, enriched the market-based approach to the disposal of defaulted bonds, and strengthened the crackdown on the issuers' evasion of debt.

China Securities Journal reporter learned that the promulgation of this document has filled many institutional gaps in China's bond default disposal mechanism, which is conducive to improving organizational efficiency, expediting risk clearing, and maintaining the long-term development of the bond market.

Improve the efficiency of default resolution

Under the guidance of the People's Bank of China, the Association of Dealers issued the "Guidelines on Default and Risk Disposal of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market" (hereinafter referred to as the "Guide"), Manager's Business Guidelines (Trial) and its supporting documents (hereinafter referred to as the "Guidelines"), "Rules for the Meeting of Holders of Non-financial Debt Financing Instruments of the Interbank Bond Market (Revised Draft)" (hereinafter referred to as the "Rules").

China Securities Journal reporters have learned that the "Rules" has established a layered voting mechanism to enhance the role of the holders' meeting in the out-of-court reorganization. Fully borrowing from overseas mechanisms for layering proposals, on the basis of extensive consultations, the establishment of six major categories of issues such as bond element changes as special proposals provides possibilities and flexibility for the restructuring of existing bonds.

The "Guideline" solves the problem of poor connection with judicial procedures. After the launch, the trustee can collectively participate in judicial proceedings such as application for property preservation, litigation, bankruptcy, etc. on behalf of investors in the entire debt. Compared with a single investor participating in judicial proceedings on its own, it improves the disposal efficiency and saves judicial resources.

A senior person in the bond market told a reporter from the China Securities Journal that in the early days of the "Guide", the market had accumulated some successful experiences and found some problems in the process of spontaneous disposal of defaults. In this regard, the "Guide" summarizes experience and provides specific guidance on issues to improve the efficiency of default disposal and protect investors' rights and interests, and aims to help conditionally troubled companies weather the liquidity crisis.

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