Default Fears as Yunnen Developer Misses Payment, Desire for "Last Mile" of Default Process

A Yunnan real estate developer missed its payment when a 2-year trust loan matured in May, but according to Chongqing Trust it has been repaid in full and there was no official default. The story gained attention with heightened investor fear over small and mid-sized developers.

Elsewhere, some in the financial sector are calling for market resolutions for defaulted bonds. The government still frequently intervenes, short-circuiting the default process with a bailout. The industry would like to see the market and legal system play a larger role in defaults.
Sina: 云南房企出现信托违约？重庆信托：全部本息已付清

Recently, a number of media reports said that Jingpeng Real Estate, a subsidiary of Yunnan Real Estate Development and Management (Group) Co., Ltd. (hereinafter referred to as “Provincial Housing Group”), due to the outstanding payment of 300 million yuan in trust debts, will trigger the private equity bond “17 provinces. The housing debt "investor protection contract clause may lead to advance payment of 500 million yuan bonds. For a time, the market's risk of repayment of the housing enterprises was "very loud." In this regard, "Securities Daily" reporter contacted the Chongqing Trust, the company's insiders said that all the principal and interest of the relevant trust debt has been paid, there is no violation.

...The report shows that the provincial housing group invested 54.12 million yuan in Jingpeng Real Estate and holds 51% of the equity. Jingpeng Real Estate has been included in the provincial housing group consolidated statement since November 2017. On May 26, 2016, Jingpeng Real Estate applied for a trust loan of RMB 300 million from Chongqing Trust. The borrowing period is 2 years and expires on May 26, 2018.

　　The report stated that since May 26, 2017, Jingpeng Real Estate has experienced a shortage of funds due to the change of the real estate market, resulting in a shortage of funds and failing to repay the principal and interest according to the loan contract. As of May 26, Jing Peng Real Estate's borrowings have all expired, only repaying the principal amount of 0.2 billion yuan, and the total principal and interest owed to the company are RMB 330 million.

　　According to the “17 Provincial Housing Debt” Prospectus issued by the Provincial Housing Group in 2017, “The default or grace (if any) of the debts of the issuer or the consolidated company’s debts is due after they are due, which is regarded as an event of default , need to start the investor protection mechanism." The trustee shall, within the fifteen trading days, convene the meeting of the holders within the fifteen trading days in accordance with the time limit agreed in the trust management agreement. If the provincial housing group's subsidiary is in default, it will trigger a cross-default clause of RMB 500 million in private debt.

　　The "Securities Daily" reporter contacted Chongqing Trust at the first time. An insider of the Chongqing Trust stated that all principal and interest involving the trust debt had been paid and there was no breach of contract. Under this circumstance, the provincial housing group’s RMB500 million private placement debt may also receive a “safety mat”, which does not constitute an issuer’s breach of the agreement under this period of corporate bonds.

Another stories discussion the change in investor perceptions around bond risk and default. No more buying bonds with "eyes closed."

Sina: 打破刚兑渐成债市共识 违约处置最后一公里仍待打通

From the perspective of a number of investment institutions that a number of factors led to the recent rise in the credit market risk.

　　On the one hand, the current overall financing environment has become tight. Financing companies with weak qualifications lacking sufficient cash flow have become more difficult and the risk of default increases. On the other hand, including the new regulations on asset management, the implementation of a number of regulatory policies has led to a weakening of the overall demand for credit bonds and a decline in investor willingness to hold them.

　　The successive breaches of the coupons also made the credit risk market’s overall risk status and future performance highly regarded.

　　According to data from the Shanghai Stock Exchange's bond business center, the default rate of unexpired corporate bonds on the SSE bond market is about 0.2%, which is relatively low. The default amount of defaulted bonds is small. In respect of listed corporate bonds with a high degree of market attention, the issuer has a rating of more than AA+ or above for 70% of state-owned companies or entities, and the qualifications are relatively good. The risk of outbreaks is also relatively small.

what's that rating worth? Earlier today State-Owned AA+ Rated Yingkou Port Defaulted on 530 Million, Has 68.7 Billion in Debt.

In response to this, the exchanges that have assumed first-line regulatory responsibilities have begun to respond in advance. It is reported that at the beginning of the year, the Shanghai Stock Exchange has specifically requested the trustee to carry out risk investigations on key industries or other high-risk issuers that expired or sold back to bonds this year, explore the risk base, and deploy and implement risk management in advance.

...In fact, risk prevention and control have always been the “emphasis” of credit bond market supervision. Information from the Shanghai Stock Exchange Bonds Business Center shows that in recent years, the Shanghai Stock Exchange has intervened in a timely manner through risk monitoring, investigation, and other means to assist bond issuers and trustee managers in formulating targeted disposal plans. As of now, the SSE has coordinated more than one resolution.

...In the eyes of the industry, the above situation indicates that the era of “buying bonds with closed eyes” has passed, and that “breaking up” has gradually become the consensus of the bond market participants. The gradual establishment and strengthening of the market restraint mechanism will help reverse the current situation in which the credit bond pricing and risk matching are not high.

　　The industry at the same time called for the “last mile” of breach of contract to be opened up in the process of credit debt becoming more market-oriented and legal.

　　Judging from the current situation, there is a strong local government intervention in the handling of bond defaults, and the result is that the credit risk has been delayed or shifted, but has not been effectively released. A number of industry experts have called for all parties to accelerate the market-based risk management of credit bonds, including improving the trading system for defaulted bonds, in order to facilitate the market to clear, in light of the initial consensus reached by all parties on the “breaking down” policy.

On this basis, the bond market risk management system framework and market infrastructure construction should also be further improved, including market-based issuance pricing, credit risk management, debt repayment risk reserve, credit rating and credit enhancement, valuation, market makers Institutions, third-party guarantees, information disclosure, etc.