Corporate notes to ease SMEs' financial strain

The nation's first batch of small-and medium- sized enterprise (SME) collective notes started trading on the inter-bank bond market Wednesday, providing an innovative tool to help solve SMEs' financing problems.

The batch consisted of three issuances at face value, with their sizes ranging from 265 to 500 million yuan ($38.8 to 73.2 million), and their coupon rates varying between 4.08 and 6.00 percent, depending on their respective maturity and investment grade, according to chinabond.com.cn.

"All the notes sold out on the second day after we published our issuing statement, and there were still investors asking for the notes after that, so it was certainly oversubscribed," said Bai Jian of Bank of Beijing (BoB), the underwriter of the $38.8 million one-year notes issued together by seven SMEs in Shunyi District, Beijing. He did not provide any figures for the over-subscription.

The SME collective note is a Chinese monetary tool that allows SMEs with low credit ratings to issue debt together.

Bai's team initially contacted over 10 companies from the bank's client pool that performed well but were in need of cash. Five out of the seven selected SMEs have BBB ratings, according to a credit rating report issued by Shanghai Brilliance Credit Rating & Investors Service.

It would be difficult for BBB companies to issue debt alone, but a collective issuance guaranteed by a high-rated guarantor, Beijing Capital Guarantee and Investment (BCGI), lifted the notes rating to A-1, the highest, according to the report.

SMEs that have low credit ratings do not necessarily have poor profitability. It can simply be because they are small or their management is not up to snuff, an anonymous trader on the corporate bond market said.

The government has been actively promoting the development of the corporate bond market as a means to help finance SMEs.

The State Council issued a notice in December 2008 to encourage financial institutions to issue SME collective bonds and other instruments.

Compared with the SME collective bonds released earlier this year, the requirements for issuing the notes are more lax, because the companies do not need to get an approval for starting a project or buying a facility before they can get the go-ahead to sell the notes, Bai said.

"No security is needed. It's totally credit-based," Bai added.

It is not clear how frequently this tool can be used though, said Wen Chunling, an analyst at Fitch Rating China.

The high rating of the notes came from the de facto guarantee from the government, but not every SME can get this kind of support, Wen said.

Money supply is always tight for small companies because there are many of them, and keeping a certain degree of competition is healthy for the development of the SMEs, said Zhao Xijun, deputy director of the School of Finance at the People's University of China.

The banks and brokerages, including BoB, are preparing to underwrite more collective notes for high-tech companies with longer maturities, Beijing Daily reported.