[Editor’s Note]
After experiencing the shock of default of high-credit-rated state-owned enterprise bonds in 2020, how will the bond market go in 2021? Which areas may be at risk? Where are the investment opportunities? The news teamed up with the professional bond information platform “Winning Tickets” to launch the topic of “Winning Tickets”, which disassembled the above-mentioned issues through interviews with senior industry professionals.
After a series of explosions in 2020, the bond market defaults continue this year.
On January 11 and 12, several US dollar debts and domestic debts of China Fortune Land Development, a large real estate company, plummeted; on January 13, Moody’s announced that China Fortune Land Development’s Ba3 The corporate family rating and the senior unsecured rating supported by China Fortune Fortune (Cayman) Investment Co., Ltd. were downgraded to B2.
According to JPMorgan Chase’s forecast, about 2.5% of China’s offshore high-yield bonds are likely to default this year. BNP Paribas Asset Management said that compared with similar bonds in the United States, Chinese high-yield bonds are very cheap.
Real estate developers are important participants in China’s offshore bond market. At the end of last year, regulators also required banks to limit real estate risk exposure. Real estate companies will become a wave of defaults this year. The protagonist? Is this an opportunity or a challenge for the Chinese bond market?
Zhang Zhijun, chairman of Beijing Dingnuo Investment Management Co., Ltd. and former general manager of United Credit Rating, witnessed the emergence of China’s high-yield bond (junk bond) market. In an interview with the news, he said that the more risks, the more opportunities for the market. The real estate industry may bring many opportunities to the high-yield bond market this year. 
Zhang Zhijun, Chairman of Beijing Dingnuo Investment Management Co., Ltd. and former General Manager of United Credit Rating
News: As a “trader” of high-yield bonds, how do you see the default of many large companies in the credit bond market since the fourth quarter of last year?
Zhang Zhijun: China’s credit bond market is close to 400,000 yuanWith a scale of RMB 100 million, breach of contract is a normal phenomenon. After Chaori Bond defaulted in 2014, the credit risk of the bond market was gradually exposed. It was not until 2018 and 2019 that the high-yield bond market appeared, and China’s bond market has truly gradually matured. Although there is still a long way to go from a truly mature market, this step can be described as a useful attempt. Generally, there are two main risks in the bond market, credit risk and liquidity risk, the most fundamental of which is credit risk.
From the perspective of bond market investment, whether a company can repay its bonds is most fundamentally dependent on whether the company can make blood, which depends on the company’s own operating conditions, Risk control and liquidity management, rather than relying on external factors. Last year’s Yongmei incident sent a stronger signal, reminding the management that if some measures and measures are not taken to curb malicious evasion of debts, it may lead to the collapse of state-owned enterprise bonds and urban investment bonds. Based on this, the central government has also taken timely measures to curb debt evasion, which has played a certain role in stabilizing the bond market.
But so far, I don’t think the fundamental problem has been solved-many companies have to deleverage and reduce production capacity under the downward pressure of the economy, coupled with trade frictions Under this pressure from the external environment, companies are facing an objective decline in their operating conditions, which in turn has led to a further weakening of the solvency of some companies. Therefore, various credit risks will be further exposed in the future, and there may be more defaults in the bond market.
News: The high incidence of defaults also exposes many ills in China’s rating industry. As an executive of a former rating agency, you have now switched to investing in high-yield bonds. How do you evaluate China’s external rating agencies?
Zhang Zhijun: It is necessary to prevent external rating agencies from entering a dead end. I (when I was still at a rating agency) also proposed to the regulator to actively request that the use of rating results be reduced. Because the greater the reliance of regulatory and investment institutions on external ratings, the more use of rating results, which will force the rating level to rise. Today, the entire bond market actually has only three levels to choose from, and more likely only two levels of difference (AAA and AA+, AA is already very difficult to issue bonds). Such rating results can hardly distinguish credit risks effectively. If rating agencies do not charge issuers, but provide credit risk assessment or bond investment advisory services to investors or institutional investors, and provide them with internal rating-related consulting or investment advice, they will not be exempt from bond issuance, supervision and investment Restrictions such as risk can truly give our judgment on credit risk in accordance with market-based mechanisms, and such professional institutions will have more market opportunities.
News: Has the risk strategy been adjusted after the Yongmei Incident?
Zhang Zhijun: Our core is still focusing on the company’s own operating capabilities, including inventory cash, cash flow, refinancing capabilities, asset liquidity capabilities, external support, etc. These have provided debt repayment guarantees for relevant enterprises. In addition, we will also pay attention to the margin of safety and estimate the possible recovery rate when the bond defaults. People often say that the high-yield bond market is very risky, but I think that if it can be bought at an appropriate price, the risk is completely controllable, including default bonds. The most important thing is that the risks and benefits need to be matched.
News: Compared with similar US bonds, are China’s high-yield bonds very cheap?
Zhang Zhijun: There are several reasons for the low price of China’s high-yield bonds: The first is the rule of law, and the relevant legal infrastructure is not sound enough , The bankruptcy, reorganization and liquidation of enterprises need to further clarify relevant regulations. In the United States, these systems are perfect, so the pricing mechanism of its high-yield bonds, including its valuation mechanism, is also relatively complete. In China, high-yield debt cannot be accurately valued.
Recalling several key domestic incidents in the past, Ziguang, Brilliance, and Yongmei are still in the process of disposing, and now they have not issued specific solutions, nor have they given the market a solution. Clear expectations. In China, when a company has a credit crisis or a bond default, the relevant crisis handling or default handling mechanism has not yet been formed.
Second, it is precisely because the market has imperfect and imperfect mechanisms, high-yield bonds still have some arbitrage opportunities for professional private equity institutions. However, public equity institutions are subject to various constraints such as supervision, risk control, and valuation, and they dare not enter or cannot enter this market. For example, public equity institutions can only purchase bonds with a rating of AA or AA+, and the credit risk exposure has reduced the bond rating to B. Public equity institutions must be released from the treasury, but private equity is not restricted. In the market, there will be more selling and less buying (in the case of fewer institutions specializing in high-yield bonds), the price will definitely fall. Based on this, public funds have established independent risk control and used special accounts to participate in high-yield bond investment.
News: In the current period of frequent defaults, how do you manage tail risks? What kind of high-yield bonds have more investment value?
Zhang Zhijun:From the perspective of high-yield bond investment, I think the biggest risk is credit risk, not liquidity risk. According to our point of view, investment depends on the basics of the company From the fundamentals, at least it can be judged whether its cash flow is normal, and the fundamentals can also reflect whether its foundation is solid. If the company still has certain good assets, it is easy to realize and has high realizable value, especially the unrestricted assets, even if The company is about to face bankruptcy liquidation or debt restructuring, and its bonds still have a certain investment value.
News: After regulating the financing restrictions on real estate developers, do you think real estate developers, as important participants in the bond market, are opportunities or challenges for high-yield debt?
Zhang Zhijun: The more risks, the more market opportunities. But the important thing is to have independent judgment, so as far as the real estate industry is concerned, I think there may be more opportunities for high-yield debt this year.
This is an obvious trend from 2019 to the present. We define high-yield bonds as bonds with maturity or annualized yield of not less than 8%. In the early days, we chose The debts issued are mainly private industrial debts. The real estate company debts began to gradually enter our field of vision in the second half of last year, and the urban investment debts also gradually entered our focus area. This is not our deliberate choice of real estate or urban investment, but a natural process. Because relevant companies have entered the category of high-yield debt, we only singled it out in the market.
News: What do you think of “City Investment Faith”? Still insist on it?
Zhang Zhijun: I think that both Gangchang and Faith are used to break. It’s just a matter of time. You may start from the poorer and lower-level Local urban investment began to test the impact on the entire market step by step. The central government’s attitude towards this has been very clear, that is, market-oriented bond issuance.
We are now focusing on two points, one is called “bad urban investment in good places”, because the regulatory authorities of good places don’t want the bad urban investment under its jurisdiction to default. In turn, it will affect the financing environment of the entire region, and higher-level governments may also have the strength to support lower-level governments. The second one is “good urban investment in bad places.” For example, some urban investment in some provinces is actually in danger, but I think it is unlikely that the bonds of provincial platforms will default in the short term.
News: I experienced a period of release last yearAfter loosening the monetary policy and deferring the loan repayment period, China is returning to normalization of policy. Will the default rate be lower than last year?
Zhang Zhijun: Although it is not easy to judge right now, the breach of contract will definitely continue, and its scale should not be underestimated, but it should still be within a controllable range within. However, it should be noted that there will still be cases where official statistics have not yet included some factual defaults, such as the issuance of replacement bonds, rollovers, etc., which are not considered defaults, and the separation of indirect financing defaults and direct financing defaults. For example, some provinces have defaulted on non-standard urban investment, but its rating has not changed.
News: In recent years, there have been relatively more defaults in some regions. What do you think is the problem?
Zhang Zhijun: I think it may be related to the assessment. Earlier, local assessments focused on GDP, and GDP mainly relied on investment, exports, and consumption. If “exports are not good, consumption is not good,” one can only hope that high investment can drive GDP growth. If you can’t find equity investment funds, you may choose to borrow.
In the past few years, local governments have had greater convenience in borrowing, especially in the urban investment debt link, but some did not consider the issue of debt repayment. Many private enterprises have also embarked on a misunderstanding and have begun to diversify wildly, borrowing to expand arbitrarily, and short-term debt and long-term investment. However, these have been exposed under the pressure of deleveraging in 2017 and 2018. All of these have revealed that their sense of risk and crisis is not strong enough. 