Viewpoint | Practical Analysis of the New Measures for the Administration of Corporate Bond Issuance and Trading

In order to implement the Securities Law and the Notice of the General Office of the State Council on the Implementation of the Revised Securities Law, regulate the issuance, trading or transfer of corporate bonds, protect the legitimate rights and interests of investors and the public interest, and strengthen supervision before and after the event, the CSRC revised and issued the measures for the Administration of Corporate Bond issuance and Trading in 2021 (order No. 180, Draft for comments issued on August 7, 2020). The document is in accordance with the requirements of the Securities Law (e. g., the implementation of the registration system for corporate bonds, the adjustment of the securities service business of securities service agencies from administrative licensing to filing management), and in conjunction with the "abolition of mandatory rating requirements, the prohibition of self-financing practices such as structured bond issuance, and the regulation of the underwriting business practices of underwriting agencies, new changes such as the prohibition of debt evasion by issuers, controlling shareholders, actual controllers and directors and supervisors, the adjustment of the conditions for ordinary investors to participate in public offering of corporate bonds, and the strengthening of the protection of the rights and interests of bondholders" are strictly prohibited, and Order No. 113 of the CSRC is amended. This article intends to take the above-mentioned new changes as the starting point and combine the experience of dozens of corporate bond transaction dispute cases that the lawyer has undertaken, and the practical difficulties in the revised version of the "Corporate Bond Issuance and Transaction Management Measures" (hereinafter referred to as the "Management Measures") To sort out and analyze, and get a glimpse of the new order of the future corporate bond market to return to its position and fulfill its responsibilities.

Since the crisis in the bond market, it has been a consensus to reduce the dependence on external ratings. In view of the problems of "emphasizing market share and neglecting rating quality" in China's credit rating industry, such as inflated rating and weak differentiation, reducing dependence on external credit rating has also become a factor to be considered at the policy level. Among them, in mid-November 2020, the subsequent occurrence of Henan Yongmei, Brilliance Auto, Tsinghua Ziguang and Hebei Jizhong and other AAA-rated state-owned enterprises default events also strengthened this guidance.

The "Administrative Measures" deleted the content of the original Article 19 that the public issuance of corporate bonds should be entrusted to credit rating agencies for credit rating, and also deleted the rating requirements for ordinary investors to participate in public corporate bonds (in the past, ordinary investors could only subscribe to AAA-rated public corporate bonds), which actually established a new order in which the public issuance of corporate bonds in the exchange market will completely cancel the mandatory rating.

The abolition of the mandatory rating requirement has the following advantages. First, it can promote orderly competition and a virtuous circle in the credit rating market, change the problems of rating agencies blindly grabbing the market and ignoring the rating quality, pricing by grade, rating by price, false high rating, rating results that cannot withstand market inspection, and lagging rating adjustment, which will help restore the credibility of the industry. Secondly, weakening investors' dependence on external ratings and enhancing market orientation are also in line with international trends, it is expected to promote the return of ratings to reveal the origin of risk and reasonable risk pricing in the market.

However, removing the mandatory rating requirement will also bring corresponding challenges. From the regulatory level, it is not ruled out that the issuer's own credit is uneven, resulting in increased audit pressure on the audit institutions and the emergence of a situation of hanging a leak. From the perspective of investors, after the implementation of the administrative measures, investors will face the possibility of lack of external rating results, which will also lead to the loss of favorable evidence in litigation/arbitration cases in which investors recover the issuer's default behavior and insufficient solvency, which is not very beneficial to investors, It is necessary to collect or organize other evidence chains to make up for the lack. Regardless of the effectiveness of policy implementation, the author recommends that investors (especially institutional investors) from now on establish a set of internal credit rating standards that weaken the reliance on external ratings or consult a professional team of lawyers for risk assessment.

Structured bond issuance is a strange phenomenon in the context of deleveraging and strong regulation, when it is more difficult for some market entities to raise funds through the bond market, and its essence is that issuers and underwriters subscribe for bonds issued by themselves or through other means in order to improve the success rate of bond issuance. As a result, self-financing behaviors such as structured bond issuance make it difficult for the coupon rate of bonds to truly reflect the market pricing situation, which destroys the "direct" attribute of financing and market order, and in the subsequent bond default accountability process, the issuer can use The different roles played by the "two faces" have pushed the holders' meeting into a dilemma, causing serious adverse consequences.

For this reason, the 45th Administrative Measures stipulates: "Issuers and underwriting institutions shall not manipulate issuance pricing or black-box operations; shall not seek illegitimate benefits or convey benefits to other relevant stakeholders by means of holding, trust, etc.; shall not directly or Through its stakeholders, investors participating in the subscription provide financial assistance; the issuer shall not directly or indirectly subscribe for the corporate bonds issued by it during the issuance process. If the directors, supervisors, senior managers, shareholders holding more than 5% shares and other related parties of the issuer subscribe for or trade or transfer the corporate bonds issued by them, the relevant information shall be disclosed".

The author believes that although the above provisions in the system to combat the attitude of structured bond issuance, but the actual implementation process can be achieved, in addition to relying on the issuer and other subjects of self-discipline, but also rely on the bond trustee in the bond period to focus on monitoring. The holder can play the role of "yellowbird" and keep an eye on the bond trustee. The focus can be on whether the trustee has diligently fulfilled the obligations of the manager and whether the manager has fulfilled the obligation of disclosure in a timely manner and dealt with conflicts of interest. Collect evidence to protect their legitimate rights and interests by compacting the responsibilities of the institution, specifically, tort claims, breach of contract claims or securities misrepresentation claims can be pursued (subject to specific judgments based on the actual facts of the case and relevant evidence). However, the above-mentioned accountability is different from the case where the bondholder directly sues the issuer for the payment of principal and interest in the corporate bond default dispute, but belongs to the case where the actual investor claims the fault compensation liability to the asset manager, the trustee and other subjects. There are few successful cases in capital market disputes. The reason is that there are difficulties in collecting relevant evidence and determining causality, however, bondholders are limited by various factors such as knowledge, experience, and means. It is difficult to find the trustee's violations. It is more difficult to rely on the holder's own ability to protect rights.

Underwriters in order to impact the performance of the bond market, large underwriting scale, low-cost bidding is the norm in recent years, the phenomenon seriously disrupted the underwriting market order. To this end, the "Management Measures" focus on two aspects:

1. Requiring the establishment of internal accountability mechanisms to regulate irregular underwriting practices such as excessive incentives and low-price competition;

2. Require the lead underwriter to assume higher due diligence and review responsibilities, and conduct prudent verification of the authenticity, accuracy and completeness of the corporate bond issuance documents in accordance with the principles of reasonableness, necessity and importance, and confirm that the issuance documents disclose There are no false records, misleading statements or material omissions in the information.

In fact, on December 4, 2020, the Association of Dealers has already issued the "Due Diligence Guidelines for Lead Underwriters of Non-Financial Corporate Debt Financing Instruments", which complements the provisions of the Administrative Measures. The author believes that if the underwriting institution can return to its position and fulfill its responsibilities, investors can have more protection, and the longest confession to investors is the sincere company of the underwriter. Of course, the holder may even be hurt by the underwriting agency without this company, and there is no need to complain.

In recent years, the disposal of bond defaults has become the focus of the judiciary and regulators, and the focus has not only been limited to issuers, but has actually shifted to intermediaries such as underwriters. On December 31, 2020, the Hangzhou Intermediate People's Court made a first-instance judgment on the fraudulent issuance of "Five Foreign Bonds", requiring bond underwriters and other intermediaries to bear joint and several liability to bond investors. As a result, it not only taught underwriters and other institutions a good lesson, but also pointed out another way for investors to defend their rights-to hold bond underwriters and other securities service institutions accountable. Because in the process of issuing securities, most of the underwriters are the trustees of the securities, there is a situation of competing identities between the two, thus, the issue of the underwriters' accountability has been mentioned above and will not be repeated here. It is only a reminder that if the holder has related losses, he can also focus on the due diligence of accounting firms, credit rating agencies, and law firms. According to the provisions of the Securities Law and the Provisions on False Statements, accounting Firms, credit rating agencies, and law firms may become the main body responsible for fraudulent issuance and false statements. Investors can use civil actions and administrative means, even through criminal accountability and other ways to protect their rights.

In mid-November 2020, the credit debt storm triggered by the bond default of Henan Yongmei Holdings is destined to become a landmark event in the history of China's bond default, which will gradually open the prelude to the normalization of bond defaults of state-owned enterprises, and is also expected to promote the improvement of the domestic default and bankruptcy settlement system. Thus, the subsequent handling of the incident will be related to the credit foundation of the credit bond market. On November 21, 2020, the Chinese government website announced that Liu He, Vice Premier of the State Council and Director of the Financial Stability and Development Committee of the State Council, presided over the 43rd meeting of the Financial Commission to study and regulate the development of the bond market and maintain the stability of the bond market. Focus on: Uphold attitude, maintain market fairness and order. It is necessary to seriously investigate and deal with various violations of laws and regulations such as fraudulent issuance, false information disclosure, malicious transfer of assets, and misappropriation of issuance funds in accordance with the law, severely punish various "debt evasion" behaviors, and protect the legitimate rights and interests of investors.

There are other contents that the author will not repeat one by one. The meaning conveyed is very obvious. Although it is the money borrowed by ability, it cannot rely on the cheek to default, let alone evade debts. This time, we will focus on rectifying several enterprises. For example, the investigation of Brilliance Group is a positive response to malicious evasion of debts. It is not possible to escape from bankruptcy. Regarding this, the author's team felt deeply. In many bond cases that the team has represented, the issuer's main assets have actually been preserved (some cases are the first in full), and through meticulous court preparation, the winning verdict/judgment has been obtained, which could have fully recovered the property due to it. However, have you ever thought that the issuer always rummaged through boxes and put out the token of "bankruptcy", making most of the team's efforts come to naught.

Therefore, it is urgent to rectify the evasion of debts. The "Management Measures" mainly focus on the strengthening of the legal obligations of "internal personnel". For example, if the issuer and its controlling shareholders, actual controllers and other responsible subjects have behaviors or violations of the regulations prohibited in the "Management Measures", the holder can not only hold the issuer accountable, but also tear the "veil" and directly investigate the joint and several tort liability of the responsible personnel, it is required to compensate for the losses. Strengthening measures are mainly reflected in:

1. The issuer and its controlling shareholders and actual controllers shall be honest and trustworthy, and the directors, supervisors and senior managers of the issuer shall be diligent and responsible to safeguard the legal rights enjoyed by bondholders and the rights stipulated in the bond prospectus; they shall not neglect to fulfill their debt repayment obligations or evade debts through property transfer, related party transactions, etc., and deliberately damage the rights and interests of bondholders;

2. The directors and executives of the issuer shall sign a written confirmation of the company's bond issuance documents and periodic reports;

3. The board of supervisors shall examine the documents and periodic reports on the issuance of corporate bonds and put forward written examination opinions, and the supervisors shall sign the written confirmation opinions.

4. If the issuer and its controlling shareholders, actual controllers, etc. violate the provisions of these Measures and damage the rights and interests of bondholders, the China Securities Regulatory Commission may order the directly responsible person in charge and other directly responsible persons to make corrections, supervise conversations, and issue warnings. Letters, order public explanations, order periodic reports, warnings, fines and other relevant regulatory measures, if administrative penalties are required according to law, penalties shall be imposed in accordance with regulations; suspected crimes, to be transferred to judicial organs in accordance with the law and to be investigated for criminal responsibility;

5. If the issuer and its controlling shareholders, actual controllers, directors and supervisors, and senior managers have evaded debts, the China Securities Regulatory Commission may restrict its market financing and other activities in accordance with the law, and include its relevant information in the securities and futures market integrity file database;

6. If the controlling shareholder of the issuer abuses the independent status of the company as a legal person and the limited liability of shareholders to the detriment of the interests of bondholders, it shall be jointly and severally liable for the debts of the company in accordance with the law.

Whether the above-mentioned governance measures can be effective remains to be seen. Finally, what is "debt evasion"?

There are more than the above 12 means of debt evasion, but the cracking methods can often be universal, specifically how to crack, and listen to the next decomposition.

The author holds a positive attitude towards the new changes in the aforementioned "Management Measures", but for the protection of the rights and interests of bondholders in the "Management Measures", it is obvious that the strength is not enough, and there is even a sense of "changing the soup without changing the medicine. First of all, the new changes are mainly reflected in two aspects:

1. The "Administrative Measures" divides corporate bond investors into ordinary investors and professional investors based on factors such as property status, financial asset status, investment knowledge and experience, professional ability, etc., and implements the relevant provisions of the Securities Law. The distinction of appropriateness is conducive to better solving the problem of the allocation of the burden of proof after disputes between investors and securities companies in the future, which is of great significance;

2. Adjusted the requirement that ordinary investors may participate in the subscription and trading of public bonds. On the basis of the original "Administrative Measures", the new "Administrative Measures" added two conditions for the public issuance of bonds to ordinary investors-"the issuer's net assets at the end of the most recent period shall not be less than 25 billion yuan" and "the issuer has the last 36 months. The cumulative public issuance of bonds shall not be less than 3 issues, and the issuance scale shall not be less than 10 billion yuan", and the original requirement of "bond credit rating shall reach AAA" has been deleted. The change is to achieve substantial protection for ordinary investors by further ensuring the issuer's debt solvency to reduce the risk to ordinary investors.

It is undeniable that the above-mentioned new changes can protect investors to a certain extent, but the "Management Measures", which has the greatest protection for investors, has not changed much and is not satisfactory. Why do you say that? Because the "Management Measures" does not address the core issue of whether the resolution of the holders' meeting can bind the issuer. At present, all the laws, regulations and departmental rules on bondholders' meetings only stipulate that "the resolutions formed by the holders' meeting are binding on all bondholders" and do not mention whether the issuer can be restrained. In judicial practice, this will lead to the holders of defaulting bonds who originally had expectations of the holders' meeting may be half-hearted, because they will find that it is not enough to pass the resolution of the holders' meeting, whether the resolution of the meeting of the holders is binding on the issuer depends on the mood of the issuer, and if the issuer does not agree with or does not take a position on the resolution, the holder, on its own or through the trustee, requires the issuer to perform the resolution without a legal basis and basis.

As a result, it is still a cliche that if the core problem of the holders' meeting cannot be solved, chicken ribs will still be difficult to become delicious. Of course, in order to solve this problem, it is not only necessary to continue to formulate and amend relevant laws, regulations and rules, and to supplement the legal basis for the resolution of the holders' meeting to restrain the issuer, but also to solve the bond underwriter as the convener and host of the holders' meeting. Or the motivation of the trustee to claim rights on behalf of the bondholders, which will not be repeated here.

Although the "Administrative Measures" are departmental regulations, they are of great significance to the securities field. They reiterate the basic rules of the game in the financial market, that is, "buyers are responsible and sellers are responsible". For bondholders, there are gratifying things. There are also worrying points. The author suggests that bondholders should be able to comprehensively study and judge the relevant investment behavior according to the new order of the bond market's return to due diligence, combined with their own situation, so as to avoid excessive self-responsibility and unbearable burden.