The recently-ended Central Economic Work Conference required that “to give top priority to cutting leverage ratio of enterprises on the premise that total leverage ratio is under control”.
Data provided by Chinese Academy of Social Sciences indicates that by the end of 2015, China’s total debt has amounted to RMB 168.48 trillion and the leverage ratio of the whole society has reached 249%, being of medium level. Among them, departments of non-financial enterprises had knotty problems and the debt ratio was up to 131% with an increasing growth. How to cut leverage ratio of enterprises and dissolve debt risks? Financial institutions represented by banks are the main force to de-leverage. How to make it and to leverage while effectively preventing the risks and safeguarding banks’ rights and interests is a test on the wisdom of commercial banks.
Lin Shu, GM of IB’s Investment Bank Department, stated that during de-leveraging, we should give fully consideration to characteristics of leverage of different types of industries and enterprises, take comprehensive measures, actively strengthen product innovation and application, and help enterprises reduce liability leverage ratio through market-oriented means in a stable and orderly way.
In recent years, IB actively adapts to the new economic normal. Given better comprehensive operation and the development of “big investment bank”, IB adopts multifarious direct financing approaches including debt financing tools, equity pledged financing and industrial earmarked fund, takes advantage of multiple licenses, advances non-financial enterprises to increase the proportion of direct financing, actively follows and prudently pushes forward pilot of debt-for-equity swaps, and effectively helps enterprises with their de-leveraging.
Increase the proportion of direct financing
At present, the structural reason of the high debt ratio of enterprises is that Chinese capital market is not well developed and corporate financing channels are mainly indirect financing such as bank credit. Therefore, while maintaining stable debt financing, to increase the proportion of direct financing is the most direct and effective means to reduce leverage ratio.” Lin Shu said.
The bond market is the main channel of direct financing. IB gives full play to its unique advantages and status in cutting cost and de-leveraging, supports enterprises in issuing corporate bonds, corporate bonds, short-term notes, medium-term notes, perpetual capital securities and other debt financing tools, in order to shorten the financing chain and raise low-cost fund. As of early December 2016, IB's scale of lead underwriting of debt financing tools for non-financial enterprises has exceeded RMB 400 billion and scale of underwriting ranked first among shareholding banks and third in the whole market; IB's interest rate is 1.075 percentage points lower than that of loan, and it directly helped enterprises save financial costs of more than RMB 7 billion in 2016.
To optimize the financing structure and increase the proportion of direct financing entails a sound multi-level capital market system. New OTC market is aimed at offering capital market service to innovative, start-up and growing micro, small and medium-sized businesses, and plays a crucial role in solving their problems of difficult and expensive financing.
It is introduced that IB launched “NEEQ finance” in June of last year, an innovative product tailored for NEEQ enterprises, which provide four types of products, i.e. NEEQ loan, NEEQ equity pledged financing, investment-linked loan and investment-loan linkage. Among them, “investment linked loan” and “investment-loan linkage” are equity-debt linkage products of IB in cooperation with equity investment institutions to lower the access threshold of small and micro businesses and reduce their financing costs.
More than that, IB seizes the opportunity that China gradually liberalize investment-loan linkage business pilots of commercial banks, actively develops “technological finance” and “start-up finance, and provides a complete set of financial services such as introduction of capital, listing (IPO) service, listing service on “new OTC market”, investment linked loan and listing financing of new OTC market to satisfy the financing needs of small and medium-sized businesses based on “Zhima Kaihua” growing and listing plan for small and medium-sized businesses released in 2011.
Data revealed that by the end of November, IB’s “start-up loan” has accumulatively provided service for 40 companies with a sum of RMB 34.4277 million; the number of listed companies on “new OTC market” has reached 2000; it has served nearly one thousand national high-tech enterprises.
As an important means to reduce leverage ratio of enterprises, the State Council issued Guidelines on Debt-for-equity Swaps of Market-oriented Banks, specifying that some qualified cyclical industries can turn debt into equity and reduce leverage ratio of enterprises through market-oriented debt-for-equity swaps. Recently quite a few banks announced plans to set up special debt-for-equity swaps for asset management companies and a number of projects of debt-for-equity swaps were completed.
In this regard, IB indicated that it actively follows and prudently advances pilots of debt-for-equity swaps. For enterprises with high leverage ratio but with potential value and temporary operation difficulties, IB attempts to push forward their debt-for-equity swaps in strict accordance with market principles, makes clear which institution carries out the swap, in what condition, price and withdrawal method, and helps enterprises optimize financing mechanism and reduce financial leverage ratio and debt burden.
Carry out innovative “combination”
High leverage ratio of non-financial enterprises has become a trouble for Chinese economy. The key to de-leveraging is to take comprehensive measures and carry out innovative combination.
As one of the few Chinese banking groups owning complete financial licenses, IB takes advantage of comprehensive operation, integrates multiple market resources, and offers comprehensive financing services of “equity plus debt” and “financing plus intelligence” through collaborative linkage among bank, trust, leasing, fund and asset management.
Shandong Sun Paper Co., Ltd., China’s largest tobacco card manufacturer, is a regular client in cooperate with IB for ages. In recent years, the company conducts positive transformation and innovation to achieve sustainable green development. Based on this, IB worked with IB Trust and Industrial Bank Financial Leasing provided it with private placement of RMB 70 million, M&A fund of RMB 0.388 billion and bank leasing loan of RMB 0.6 billion, cutting its financing cost and facilitating its green transformation.
Meanwhile, IB continues to make innovations and improvement in industrial fund products, establishes industrial funds with governments or corporations, and assists enterprises in reducing leverage ratio of the real economy while increasing financial supply. In August 2016, Fujian Provincial Department of Finance and IB co-initiated “Fujian Province’s Public-Private Partnership (PPP) Earmarked Fund” with a scale of RMB 20 billion. With the help of PPP financing mode, IB positively guided social capital to infrastructure construction and optimized debt structure at source. At present, it has 6 projects in store with a total investment of RMB 16.645 billion.
IB and IB Trust, a subsidiary of IB, promoted the establishment of Xi'an High-tech Zone Software Park Industrial Fund with a scale of RMB 5 billion, which adopted innovative portfolio investment of equity and debt, invested in Xi'an High-tech Zone Software Park Development Co., Ltd. that got the franchise of building and operating Software Park projects, and boosted the rapid development of a new generation of information technology industry in Xi'an even in Shaanxi province.
Activating the stock of assets of enterprises, through which enterprises can get fund to repay some of debts so as to reduce leverage ratio, is one of IB’ measures. Up to now IB’s corporate asset securitization business has completed RMB 90.927 billion. Take “2016 trust asset backed notes (Stage I) of Jointown Pharmaceutical Group Co., Ltd.” as an example, it is the first circular purchase structural asset backed notes in China with an amount of RMB1 billion and IB as the lead underwriter. IB effectively reduced financing costs of enterprises through a structure design featuring internal and external credit and public offering. To put it at length, the accounts receivable for medicine and medical equipment sale of second-class hospitals and above of Jointown were the basic assets, and priority products and secondary products occupied 77.7% and 22.3% respectively. Priority products combined both internal credit measure with classified principal and interest repayment order and external credit measure featuring filling the gap and can reach AAA level.
Against the backdrop of the “Belt and Road Initiative”, IB also turned to overseas market, helps qualified enterprises borrow local and foreign currency funds from overseas banks, and opens up new channels of low-cost financing with the help of IB’s Hong Kong Branch, FTZ Branch and other overseas financial institutions. In order to save financing costs of transportation infrastructure in Ganzhou, IB actively promoted product innovation, issued guarantee to overseas bank, took advantage of leasing company, introduced low-cost overseas funds, and granted $7 million to Ganzhou Expressway Co., Ltd. with a comprehensive cost falling by 5% compared with the benchmark interest rate, far below the current market interest rate.
In order to effectively cut the operating costs of enterprises, IB continues to reduce fees, provide benefits and reduce their financial costs. In terms of commissions of intermediate business, apart from original free items, small and micro businesses are exempt from 8 types of fees including corporate overdraft fee, acceptance commitment fee and daily financial advisory service fee. With regard to financing interest rate, for small and micro businesses and individual business owners, IB offers “IB express” comprehensive financial service programs; for clients in loans with better cooperation and good credit records, they can enjoy preferential interest rate to save financing cost.