Regulator Criticizes Three Bond Underwriters in Yongcheng Coal Scandal

China’s interbank bond market regulator has criticized three more financial institutions involved in shady bond issuances by state-owned Yongcheng Coal, the latest of 11 companies to be named and shamed after the coal miner’s surprise default shattered confidence in debt offerings by state-owned enterprises (SOEs).

On Friday, the National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory body under China’s central bank, announced that three major underwriters of Yongcheng Coal’s bonds — Industrial Bank Co. Ltd. (link in Chinese), China Everbright Bank Co. Ltd. (link in Chinese) and Zhongyuan Bank Co. Ltd. (link in Chinese) — had violated self-regulatory rules of the interbank bond market.

Violations included failing to adequately ensure the quality of due diligence and further verify Yongcheng Coal and Electricity Holding Group Co. Ltd.’s independence or anomalies in its cash, NAFMII said.

Yongcheng Coal’s default on a 1 billion yuan bond in November triggered a chain reaction, affecting other SOEs and coal mining companies, which either canceled bond issuance plans or slashed fundraising targets. The bond market turmoil has eroded investors’ confidence in SOE bonds, undermining the perception they enjoyed implicit guarantees against default.

To date, NAFMII has disciplined two bond issuers, seven financial institutions, an auditor and a credit ratings firm for misconduct behind the Yongcheng Coal default.

The two issuers — Yongcheng Coal and its state-owned parent, Henan Energy and Chemical Industry Group Co. Ltd. — had little awareness of information disclosure and compliance, while the intermediaries failed to adequately act as gatekeepers, NAFMII said in a statement (link in Chinese).

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The issuers failed to disclose accurate and complete information on bond sales or some asset transfers, and the parent company bought its own and its subsidiaries’ bonds, which led to a breakdown in market order, NAFMII said Thursday. Both of them were banned from bond sales for more than half a year.

Two intermediaries were banned from new business of rating interbank bonds or auditing interbank bond issuers’ financial reports for three months, NAFMII said in late December. They were China Chengxin International Credit Rating Co. Ltd., which gave Yongcheng Coal the highest AAA rating just a month before its default, and Yongcheng Coal’s auditor Xi’an Xigema Certified Public Accountants Firm Ltd.

In addition to the three banks singled out for criticism on Friday, four financial institutions that facilitated Yongcheng Coal’s illegal structured bond sales received warnings from the bond regulator earlier this month and were told to rectify wrongdoings.

Using fund accounts at various companies including Donghai Fund Management Co. Ltd., Haitong Securities Co. Ltd. and two of its subsidiaries helped bond issuers buy a portion of their own offerings and trade the bonds they issued, Caixin previously reported.

As a self-regulatory organization, NAFMII said (link in Chinese) it has sent evidence collected in the cases to the People’s Bank of China and China’s top securities and banking regulators, which will likely issue penalties to the companies.

In December, the central bank and other financial regulators pledged to deepen reforms in the country’s bond market and strengthen law enforcement amid a rising wave of defaults, echoing top policymakers’ call to improve the rule of law in bond markets.

Contact reporter Luo Meihan (meihanluo@caixin.com)

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