Credit Guarantee Firms Go Down Like Dominoes

Credit guarantee firms are a nexus point in the credit bubble. All manner of over leveraged borrowers (think rehypothecated copper and steel) with no experience in the credit market started or invested in credit guarantee firms. These firms helped marginal borrowers obtain credit, and some of them opened their own credit guarantee firms. Most recently was the story of Beijing residents going to credit companies for real estate spec loans. They can also serve as the link between companies' mutual credit guarantees, such as the web of guarantees seen in a city like Xiaoshan or among the steel traders, who all opened credit guarantee firms and guaranteed each others' debts.

In the article below, it gives Wenzhou as an example. 90% of the credit guarantee firms have closed or gone bankrupt. Zhejiang province's bankruptcy case load jumped 145% last year and the amounts involved jumped 600%. This year is expected to be worse.

This quote sums up the situation (and does this not bring to mind AIG): "The profit model is an important reason for the large-scale collapse of credit guarantee firms, a 2% profit is not sufficient for taking on 100% of the risk."

A Chinese microfinance firm went public today in Hong Kong: Han Hua Financial (3903). Shares are trading near the low end of the IPO range. The article below notes the firm had to delay its IPO in March. I haven't heard of the company before; it might be a financially sound firm. It might be a good buy (one day) if it is well run, because a lot of the competition is going away.

In recent years, the shadow of bankruptcy financing guarantee company continued, the security industry has shown signs of closures nationwide spread.

Bankruptcy Cases abound. Sichuan Province has 12 security companies were canceled due to failure, 23 companies require rectification; Guangdong has more than 30 security companies out of the financing guarantee market; Urumqi city police department has seized nearly 90 Investment Guarantee Corporation. In addition, Zhejiang, Jiangsu, Henan, Hubei and other places, there have been similar cases, most of the security company or transfer, or reorganization, or to change or cancellation.

Industry insiders estimate that the industry will face a tough year guarantee major reshuffle process, the domino effect of short-term is difficult to end, only a few state-owned enterprises with the background will win in this round of the fittest, and this year there will be over 1/3 of the guarantee company will be cleared away.

This year the situation is worse

Sichuan capital predators "Hua Tong Line" actual control of suspected foot roll of smoke has not yet dispersed, southwest entrance there are large security company investor Huitong guarantees pull "Give me my hard-earned money," Sichuan has become the banner ...... Guarantee industries hardest hit.

It is understood that in this year's annual enterprise in Sichuan dozens financing guarantee company into bankruptcy abyss; has 12 security companies are classified as substandard company and canceled all business licenses shall continue financing guarantee business; Another 23 companies were classified as corrective companies.

"In recent years, the security company foreshadowed the blind expansion of the crisis." Chang Chong Hong, president of the Division of Financial Holding Group, said that with the continuous progress of financial disintermediation, the continuous expansion of private financing markets, such as the mushrooming growth of private Financial institutions will inevitably varies greatly, more qualifications are not high security collapse of the company has been inevitable.

Song Qinghui known financial commentator, said large-scale collapse phenomenon financing guarantee company and industry reshuffle its inevitability. There are three main reasons: First, the extraordinary development of the industry a few years ago after natural selection; Second, the institutional reasons for the industry; Third, under the premise of the economic downturn, small and micro enterprises a significant decline in willingness to lend, banks have increased the guarantee threshold disguise .

Wenzhou is one example, the entity behind the wave of corporate bankruptcies is super close Jiucheng guarantee companies collapse. 2013 in Zhejiang province's courts handled 346 cases of bankruptcy, an increase of 145.07%, total debt amounted to 159.5 billion yuan bankrupt enterprises, more than 24.3 billion yuan in 2012 increased by nearly six times. Which occurred in Wenzhou have 198 companies from bankruptcy. Determine the industry, this year's situation may be even worse.

"Large-scale collapse of the security company, the profit model is an important reason, is not sufficient to undertake a 2% gain to 100% of the risk." Changhong said that, in general, the security company profits from the amount of guarantee commission income and about 2% of the bank Interest margin, but will have to cover 100 percent of compensatory risk, return and risk serious mismatch.

Most "Most security companies closed down, not unwilling to repay the loan, but can not afford to repay." Shenzhen another financing guarantee company responsible person, fine chase the entire warranty chain, whether it is to lend money or guarantee funds come from private lending Once funding strand breaks, bankruptcy is almost the only choice.

According to Guangdong Provincial Finance Office open information, as of June 17 this year, Guangdong Province, has more than 30 security companies out of the financing guarantee market. And this data is basically the same as the number in 2013 the province was investigated serious violations security company. At the end of 2013, Guangdong Province, serious violations of security agencies to clean up 36 branches 13.

Xinjiang is not optimistic. As of May 18, 2014, the Urumqi Municipal Public Security Bureau has seized nearly 90 Investment Guarantee Corporation, involved in multiple areas.

Listed obscure worries

One side is the national security industry suffered much cold, the other side is in full swing guarantee companies listed in Hong Kong.

Following the integration of financial guarantee companies in Guangdong Group successfully listed on the Hong Kong Stock Exchange, the security company from Chongqing Han Chinese Hong Kong Holdings also recently prospectus. Barring unforeseen circumstances, Han Hua Holdings will become after the second private integrated financial guarantee companies listed in Hong Kong.

Integrated financial guarantee business is the first domestic listing, the prospectus by the blitz period, reaching about 21 times oversubscribed. The successful listing of financial integration allows the ailing domestic security industry saw the light. Foshan Municipal Finance Agency have said, "This shows that the business model of domestic security company gained recognition overseas investors, but also for other security companies listed paved the way."

Success inspired a lot of cases listed mainland companies listed in Hong Kong guarantees enthusiasm, Han Hua Holdings is one of them. According to Han Hua Holdings May 30 released prospectus, the SNG Holdings plans to sell 1.15 billion H shares, the offer price between HK $ 1.55 ~ 2.05. Compared to the smooth integration of financial listed road listed SNG Holdings obviously less than ideal, and even had to temporarily delay the listing plan.

In addition to the factors of poor market conditions, the performance of SNG Holdings itself did not show strong growth, the company prospectus shows that 2013 net profit of SNG Holdings 357 million yuan, 518 million yuan a year earlier fell 31.1%. While net profit decline is rising default rates. 2013 Han Chinese FHC default rate reached 1.6 percent, while the 2012 and 2011 default rates were 1.2% and 0.4%.

Market prospects for the future for this company does not seem optimistic. In research reported in Qilu International pointed out that if the economy continues to decline, impairment and default risk loans will increase, coupled with the lack of listing price advantage, giving Han Hua Holdings "neutral" rating.

More than half of listed financial integration, performance is also somewhat unsatisfactory. First annual report released after the listing shows that in 2013 the Group's operating income of 53.33 million yuan, down 6.7%, net profit of 19.04 million yuan, representing a decrease of 60% in 2012.

From the annual data, the integration of financial revenue decreased slightly, mainly due to the financing guarantee business is a cold case. At the end of 2013, accounting for 78.2% of the financing guarantee business integrated financial group revenue, revenue from financing guarantee services decreased compared to 2012 by 7.7%.

Silver and Steel Holding responsible Cheng told reporters, security companies listed in Hong Kong in order to guarantee more than a gimmick, in fact, also carried out other operations, many companies are guaranteed to Noah wealth target transformation.

Financial integration is an example, the company responsible person has said, now integrated into Internet banking has financial, wealth benefits its collection network to get involved in a network of credit.

"No fun game."

Cheng Gang who runs a security company in Shenzhen, up to 6 years, but now the company has secured grant, fought in the field of real estate funds.

"Such a small broad guarantees more game play does not go, leverage is too high, the risk is too great, with tighter regulation and the real economy downside risks companies face increasing security." Cheng Steel said in an interview with reporters.

According to him, the security industry's profit model there are two categories: one is to cooperate with the bank guarantee fees earned; Second, illegal usury, these two models now are facing challenges.

Guarantee industry was seen as a bridge between banks and SMEs, but uncertain economic environment so that the industry suffered severe winter. And this is guaranteed by the high leverage operational characteristics industry decision: lower commissions earned, but the risk is very high, especially in the economic down cycle, increased business risk SMEs will directly lead to increased risk of the company.

"Now the industry is very cautious of doing business, we generally charge an annual guarantee fee of 2.5% to 3%, but the risk of a single business almost 30 single to make, so some businesses would rather not do." Chang Hong told reporters.

Bank credit crunch is also an important reason. Commercial bank loans this year, more cautious, so the threshold increase as secured loans, many small and medium sized companies is difficult to obtain credit guarantees. Many banks to increase the development of small and micro finance credit loans, unsecured unsecured loans which is equal to a direct cut off the main source of profit guarantee industry.

A joint-stock commercial bank small micro-credit sector executives admitted to reporters that this year many companies close down on foot tide guarantee, banks also suffer along with cooperation, which the bank has suspended cooperation with the security company and instead develop 100 yuan credit.

Guangdong Provincial Finance Office in a report that the current financing guarantees outstanding issues facing the industry in the development are: First, the credit cooperative banks is still very difficult to bear. Affected by various factors, a number of banking institutions bear a significant drop silver scale cooperation, or even stop the business cooperation; Second, the security industry is still relatively low level of profitability, profit model to be optimized. Last year net profit of 880 million yuan guarantee industry in the province, representing a decrease of 12%, the average return on capital, return on assets are at a low level.

Looking transformation of the way

In fact, the domestic security industry has been in the process of consolidation of the side edge development.

As early as 2010, "Interim Measures financing guarantee company" seven ministries jointly issued open rectify the security industry. After a few years, the authorities have launched a jurisdiction over the company's risk investigation and secured qualification for retrial.

And since the beginning of this year, for some regions the number of non-proliferation financing guarantee companies, business phenomenon of chaos, the CBRC, NDRC and other eight departments jointly issued a notice of non-financing guarantee company shall be clean-up specifications.

May 30, 2013 annual summary report issued by the CBRC, which would require banks to credit risk mitigation platform, and control of real estate loan risk, to prevent the risk of overcapacity. Meanwhile, the CBRC also required to do four risk marker, that does not regulate financial products, not prudent trust business, financing guarantee and microcredit.

"Some problems in the past few years, the explosive growth of the security industry's exposure to hide out in the consolidation, with tighter regulation, the security company before some non-standard operations are difficult to sustain, so many companies are looking for transformation." Cheng Gang to Reporter said.

"With the shuffling forward, the future of the security industry may form several dominant pattern." Changhong said, with a strong background in state-owned security company will move toward a comprehensive restructuring of the financial holding group, gradually weakening the dependence on the guarantee business ; registered capital of 200 million yuan less than the majority of security companies will disappear in the shuffle; only a very small portion may take the professional path segments of the industry, an industry specializing in the field of security services.

In Songqing Hui seems that the future will be secured financing industry towards the development of two trends: First, the regulatory level, SME financing guarantee industry has a positive role in promoting development, the government will regulate the industry for financing guarantees and support; Second Industry level, reinforce their risk management capabilities and product innovation capability, enhance the future of credit guarantee companies need to rely on the strength of two inevitable path.

Turning to the problem of restructuring the security industry, the industry average number of respondents said that the security industry must get rid of the status quo is highly dependent on the bank of the future direction of the transition have to seek a listing, participation in equity investment and wealth management.

According to the reporter, most security companies only to retain the traditional guarantee business, but both are developing the comprehensive financial direction, they target the wealth management business of equity investments across multiple platforms, such as Internet banking, both listed in Hong Kong The company and both are true.

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