Regulatory system for behaviours of bond default subjects

Types of bonds under China’s current legal and regulatory frameworks can be roughly divided into enterprise bonds, corporate bonds, financial bonds, and government bonds. Although the regulatory rules and trading venues of the above-mentioned bonds are different, the nature of their risks and their fundamental legal relationships are identical from the perspective of bond default. Clarifying the regulatory system for behaviours of bond default event related subjects is the starting point of the analysis of bond default events. Taking corporate bonds for example, the core parties involved in a default event are the issuer, the bondholders and the trustee, and the risk-dissolving method is also centered around the regulatory system exercised by the market and the regulatory departments for the behaviours of the above-mentioned subjects.

Issuers. The nature of the legal relationship of corporate bonds is a kind of capital loan relationship established by the companies (debtors) and the investors (creditors) in the capital market. The fundamental purpose of the regulatory system for the behaviours of a corporate bond issuer is to establish its obligation of repayment as a debtor, and to make in a relatively coercive way the credit risk, which is not easy to be discovered, be revealed. The core of the regulatory system includes the issue admission mechanism, information disclosure system, and credit rating. Meanwhile, strict restrictions have been made on the issue mode on the basis of the above regulatory system (non-public issues and public issues).

The essence of a bond default event is that the issuer cannot fulfil its obligation of repayment under the bond contract. But the consequences of such default are not exposed at the last minute of the imminent payment, and once the bond payment risk is incurred, the basis and handling mechanism for the claim of the issuer will be very simple and clear. So, the core of the regulatory system for issuers’ behaviours is the “early warning” before risk exposure, such as the mandatory disclosure of major matters that may affect the solvency and the price of bonds, and the adjustment of the bond credit rating by rating agencies. The mandatory early exposure of risk information is the key to differentiate the regulatory system for behaviours of the bond issuers and that for the general debtors.

Yao Xiaomin and Wang Qing are partners at Lantai Partners