New Corporate Bond Program to Assist Cash-Challenged Companies

China’s top industrial policymaker has launched a program making it easier for companies to issue bonds to pay back other debt, in a drive analysts said is aimed at easing pressure on firms facing too many short-term obligations.

The latest program from the National Development and Reform Commission (NDRC), one of China’s major regulators that approves corporate bond issues, could especially help the nation’s real estate developers, many facing liquidity problems as the entire market slows. But some cautioned the new program’s conditions may be too high for many, limiting its effectiveness.

The new program will support companies with AAA credit and stable business operations, the NDRC said in a notice (link in Chinese) on its website last week. Real estate companies with total assets of over 150 billion yuan ($21.8 billion), more than 30 billion yuan of annual revenue, and debt-to-assets ratios lower than 85% will be eligible to issue bonds, said the notice.

But the regulator also introduced restrictions on the use of raised capital. Bond issuers are not allowed to use the money for lending, speculative real estate investments or securities investments that are irrelevant to the issuers’ operations. Bond issuers can also use no more than 50% of the raised funds to supplement operating capital.

The new program provides firms with quicker and simpler access to approval for new bond issues than the existing procedures. It also comes amid China’s ongoing campaign to support companies that previously relied on a shadow banking sector that is now the subject of a broader government cleanup.

“The purpose of this policy is mainly to encourage firms to repay debts. Companies can only use the funds to supplement operations under certain conditions,” a source in the finance industry told Caixin. The source added that firms issuing bonds under the new program must also provide feasible plans for how they will repay the debt.

One group that could benefit from the new program is real estate developers, many of which face cash crunches. The NDRC has strictly controlled real estate financing in recent years, and has only given the go-ahead for developers to raise funds for public welfare programs, including affordable housing, shantytown renovation, and leasing projects.

The industry could come under heavy pressure soon when a peak of debt comes due for repayment in the first quarter of 2019, according to a research report by Haitong Securities. In November, the total value of domestic bonds issued by property enterprises reached 52.3 billion yuan, up 14% from the previous month and more than double from a year earlier, according to data from financial information provider Wind.

Analysts said the new bond-issuing program could help high-quality property enterprises to ease their debt repayment pressure, though it will be less helpful to small and midsize firms that lack the necessary high credit levels.

But even some large firms may have trouble accessing the program due to their relatively high requirements, said Xia Lei, chief analyst of the research center at developer Evergrande Group. He said the policy appears designed to stabilize companies’ capital. But Caixin’s calculation showed that even Evergrande, one of the nation’s top developers, would not qualify to issue bonds under the new program due to its high debt ratio.

Contact reporter Timmy Shen (hongmingshen@caixin.com)