Stealth Risk From Hidden Pledged Loans

Trade wars aren't pushing China's stock market lower. It's the credit cycle. Reflation #3 is gone. Pledegd loans going bad are one consequence of tighter credit.

Now analysts warn of stealth risk from companies and shareholders that haven't fully disclosed their borrowing activities. They also report financing is rising for borrowers trying to rollover their loans. Also, one analyst says some defaults may be strategic with large shareholders enlarging their stake at cheap prices.
全景网: 质押违约潮逼近 识别“隐身”高危股很重要
Beware of "stealth" pledged default shares

  Since the beginning of this year, the Sunny (named) business engaged in financial intermediaries has been very busy. The financing needs of the major shareholders of the listed companies have been extremely strong, and the off-market pledge business has been very hot.

  “At present, the risk of default on stock pledges is more severe than the previous ones.” It is not surprising that Hao Yu’s continued exposure to large shareholders’ pledges has hit a closing line. He briefed reporters on the risks inherent in the current stock pledge, and the specific conditions were divided into many categories. It is quite common for a large shareholder to pledge before the company's stock price is high, and thereafter the stock price continues to fall, and the pledge will not be able to redeem or make up short positions when it touches the liquidation line or expires.

  There is also a risk of collateral risk. Major shareholders have made multiple pledges outside the court, but they have not reported it to the company. The risk of this kind of pledge is that the actual leverage ratio of the company and its major shareholders is much higher than that disclosed to CSDC. Defaults are often triggered when the stock price falls. Many of the “flash collapse shares” are such cases.

  The worse case is that some major shareholders use cash for the purpose of pledge and do not favor the company's development prospects. Many of these listed companies have been short-sold, and the major shareholders pledged when the share price was too high. Even if the positions were closed or even opened, there was no intention to repurchase or cover their positions.

  In the view of many market participants, the risk of this round of stock pledge is the effect of the continuous accumulation of both the company’s own high leverage and the overall tightening of liquidity.

  The listed company where Li Wei (a pseudonym) is located is the first case. In the past five or six years, the company has started the transformation of its main business, and the outsourcing of mergers and acquisitions and endogenous development has greater demand for funds. At present, the company’s controlling shareholder has pledged more than 95% of its shares and has just completed a pledged extension. "There are funding gaps. Now that the major shareholders have a very tight capital chain, they can't do a good job of refinancing, and bank loans can't be approved. There is still some room for the pledge to reach the liquidation line, but if the stock price falls further, it will happen. There is no way to make a position."
It's still unclear how large of an impact this will have on the wider market. For now, analysts think the problem is larger than understood, yet losses have been concentrated in the stocks directly exposed. Costs for pledged stock loans are also rising in cost, making it more difficult for borrowers to roll over their loans:
“In the case of brokerage firms, after the introduction of new regulations on the pledge, the qualifications of shareholders and the direction of financing have begun to tighten, and the discount rate for pledges is very low. It is of little significance to many corporate big shareholders. The book rate can reach 12% to 15%, and the overall cost after the agency fee will not be lower than 14%. For some companies with less qualified qualifications, the cost will be even higher. I know of a company's shareholders pledged loan cost 18% to borrow new money. This money is life-saving money, has not considered the issue of cost." Hao Yu said.

  The actual risk of defaulting in the pledge may be far more severe than the disclosed situation in which the shareholders of the listed company touched the open position.

  Yao Yu said that currently there is no large-scale outbreak of the strong level, on the one hand due to partial default of the pledged shares can not be overpowered, for example, some pledged shares are unscheduled limited-sale stocks, there is a lock-in period or ratio of the senior executives Lock stocks. In addition, the stock reduction should meet the current new regulations for reduction, and the financial parties also do not want to see any news unfavorable to the stock price at this time and may be forced to do the extension.

  “For the capitalists, they don’t actually want to obtain stocks through Qiangping, but they want to receive interest. So sometimes they will continue to postpone the extension and take the time to change the space. If the listed company issues an announcement that major shareholders have closed, the basic There is no way to do it before they will burst out." Hao Yu also said that during the expansion of the process, the funds will more than do with the market value management, such as suspension of reorganization or paste some hot topics labels. In this case, the financiers instead took the initiative to secure the funds.
Finally, some large shareholders may have designed the loans to fail. If the company defaults and the share price collapses, they can acquire more shares at a low cost.
The listed companies with a large number of trust plans are also high-risk targets in the storm of default. According to Haoyu, some of these trust plans are for large shareholders to allocate capital outside the market to increase their shareholdings. When the stock price fluctuates, they will passively trigger an explosion and increase the downward trend in share prices.

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