Issues Relating to Small and Medium Sized Enterprises' Issuance of Collective Enterprise Bonds

Diversification of the Committed Investment Projects

Previously, the issuers of enterprise bonds were usually large enterprises, and accordingly most of the committed investment projects were fixed asset investments (or fixed asset investments carried out by their invested companies). By comparison, the committed investment projects of small to medium-sized enterprises are more diversified. Pursuant to the current regulations, if the funds raised by collective enterprise bonds are invested into fixed asset investment projects, the total amount of the issued bonds shall not exceed 60% of the total investment of such a project. If the fund is used to purchase equity interests or shares, the above-mentioned proportion shall apply likewise. If the raised fund is used to complement working capital, the fund used for the working capital shall not exceed 20% of the total amount of the issued bond. It is noteworthy that if a bank agrees to evidence that the bond is used to pay off the debt, no proportional limitation will apply.

Guarantee Methods for the Small to Medium-Sized Enterprises to Issue Collective Enterprise Bonds

In order to get a higher credit grade, it is common practice for small to medium-sized enterprises to enhance their credit grades by providing security and guarantees. It was the China Development Bank that provided a full, unconditional and irrevocable guarantee on a joint and several basis for the issuance of the 2007 Shenzhen Small and Medium Sized Enterprise Collective Enterprise Bonds. However, according to the Opinions on Effectively Preventing the Risks of Security Regarding Enterprise Bond promulgated by the China Banking Regulatory Commission in October 2007, banks are banned from providing security and guarantees for enterprise bonds. According to the latest draft collective bond guarantee plan promulgated in Shenzhen and Shanghai, security or guarantees are usually provided by qualified institutions such as professional underwriting companies or some large companies with high credit grades. In addition, the special fund raised by governmental authorities may provide re-guarantee in addition to the principal security. For example, the Shenzhen Small and Medium Sized Enterprise Collective Enterprise Bond Credit Enhancing Fund set up by Shenzhen government will provide re-guarantee to the new 2008 bond according to the notice of the Shenzhen government.

Separate Repayment Account

Should the Small and Medium Sized Enterprise Collective Enterprise Bond open the repayment account jointly or separately? In the case of a joint repayment account, account management problems may arise as it is difficult to allocate cleanly the repayment liability among issuers. Both of the Detailed Implementing Rules on Organization and Issuance of Small and Medium Sized Enterprise Collective Enterprise Bond stipulated by Shenzhen government and the Pilot Rules on Small and Medium Sized Enterprise Collective Enterprise bond drafted by the Shanghai government specify that the issuers of the collective enterprise bonds shall open accounts separately as required for paying off the principal and interest of the bond. The principal underwriter shall monitor the issuers and guarantors to remit the principal and interest to the debt service account in time and in full pursuant to the repayment plan.

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