Shanghai Stock Exchange has released the Letter on the Trial Implementation of Classified Supervision on Corporate Bonds of Real Estate and Industries with Excess Capacity (hereinafter referred to as “the Letter of Supervision”) to each corporate bond underwriting institution, proposing for a trial implementation of classified supervision on the examination over corporate bond issuance of real estate, steel and coal industries with excess capacity. The Letter of Supervision also makes it clear that no funds raised by real estate enterprises through issuance of corporate bonds may be used for land acquisition.

Threshold for bond issuance of real estate enterprises: 4 conditions + 5 indicators

The Letter of Supervision points out that, the standard of “basic scope + comprehensive indicator evaluation” will be taken for classified supervision on the real estate industry. Real estate enterprises that conform to the requirements of basic scope shall meet such conditions as good qualification, theme rating of AA or above, and ability to strictly implement the state’s real estate policy and market regulation policy. Issuers are limited to four types of enterprises: (1) real estate enterprises listed at home and abroad; (2) central enterprises focused on real estate; (3) real estate enterprises affiliated with local governments on the level of provinces (municipalities directly under the central government), provincial capitals, sub-provincial cities or cities with independent planning; (4) other private non-listed real estate enterprises ranked among top 100 by China Real Estate Association.

As to real estate enterprises that conform to the requirements of basic scope, the Letter of Supervision has also made further selection after evaluation based on five comprehensive indicators, and divides real estate enterprises into normal class, attention class and risk class. These five indicators are: total assets by the end of the most recent year are smaller than 20 billion; operating revenue of the most recent year is smaller than 3 billion; net profit after deduction of non-recurring profit and loss of the most recent year is negative; the asset-liability ratio after deduction of advances received by the end of the most recent year is higher than 65%; and real estate business accounts for over 50% in cities other than first-tier or second-tier ones.

Further, the Letter of Supervision also makes it clear that no real estate enterprise that falls in any of the following three circumstances may be allowed to issue corporate bonds: first, the enterprise has committed a major violation against the provisions of “GBF [2013] No. 17” during the reporting period, or the enterprise is investigated by the land & resources authority and has not made rectification as required; second, during the period of real estate market regulation, the enterprise has conducted such activities as auction for “land king”, bidding up land prices, etc., in cities under focused regulation; third, funds raised from the previous issuance of corporate bonds have not been fully used yet, or the enterprise has made illegal use of raised funds during the reporting period.

Four types of coal enterprises and three types of steel enterprises are not allowed to issue bonds

At the same time, the Letter of Supervision has also put forward the requirements toward classified supervision on corporate bonds of coal and steel industries with excess capacity. For classified supervision on industries with excess capacity, the standard of “industrial policy + comprehensive indicator evaluation” will be taken.

In respect of industrial policy, Shanghai Stock Exchange will temporarily not accept the application for issuance (listing) submitted by any coal enterprise that violates the state’s relevant policy requirements. Specific criteria include the following four circumstances: violate any provisions of GF [2016] No. 7 by increasing coal production capacity; fail to resolve coal overcapacity in accordance with the provisions of GF [2016] No. 7; not conform to the requirements of GF [2016] No. 7, with unsafe production, illegal construction, involvement in low-grade coal, or a production scale of less than 3 million tons/year; and according to the Notice on the Implementation of Joint Punishment over Illegal Construction of Coal Mines, there is any coal mine under illegal construction or production, or any issuer punished jointly by relevant authorities.

In the meantime, a “negative list” also exists with respect to steel enterprises issuing corporate bonds, i.e. violate the provisions of GF [2013] No. 41 and GF [2016] No. 6 by increasing steel production capacity; fail to resolve steel overcapacity in accordance with the provisions of GF [2016] No. 6; and not an enterprise or enterprise group on the list of three-batch enterprises defined in the Standard Conditions for the Steel Industry announced by MIIT (Ministry of Industry and Information Technology of the People's Republic of China). The above three types of steel enterprises are not allowed to issue corporate bonds.

As to industries with excess capacity that conform to the state’s industrial policy requirements, Shanghai Stock Exchange will also make further selection based on six comprehensive indicators, specifically including: net profit of the most recent year is smaller than zero; average value of operating net cash flows of the most recent two years (three years if steel enterprises) is smaller than zero; total assets by the end of the most recent year of coal enterprises and steel enterprises are smaller than 40 billion and 80 billion respectively; operating revenue of the most recent year is smaller than 15 billion and 45 billion respectively; gross profit rate of the most recent year is smaller than 10% and 5% respectively; asset-liability ratio of the most recent year is higher than 75% and 80% respectively.

The purpose of fundraising by three types of industries must be clear

According to the aforesaid comprehensive indicators, Shanghai Stock Exchange divides real estate enterprises and industries with excess capacity into three classes, including normal class, attention class and risk class. Wherein, enterprises that trigger two indicators will be included into the attention class, enterprises that trigger three or more indicators will be included into the risk class, while the rest will be included into the normal class.

With regard to any issuer of “risk class”, Shanghai Stock Exchange requires the lead underwriter to take strict risk control measures and be cautious in undertaking relevant projects; while for any enterprise rated as “attention class”, the issuer and lead underwriter shall carry out further disclosure and verification in accordance with relevant provisions.

In addition, Shanghai Stock Exchange has also made reasonable and prudent arrangements for the use of funds raised by the aforesaid three industries through issuance of corporate bonds, including the scale of fundraising, purpose of fundraising, disclosure within the duration, etc. For example, the minimum capital ratio of real estate enterprises for affordable housing and ordinary commercial housing projects shall not be lower than 20%, and shall not be lower than 25% for other projects; the minimum capital ratio for steel projects shall not be lower than 40%, and shall not be lower than 30% for coal projects.

The Letter of Supervision also makes it clear that no funds raised by real estate enterprises through issuance of corporate bonds may be used for land acquisition, and the issuer must issue a written commitment in this regard.