SME financing, a new game for old problems

Wenzhou has always been at the forefront of China's financial reform. In the early 1980s, the Jinxiang Rural Credit Cooperative in Cangnan County, Wenzhou experimented with "fixed deposits with loans and floating interest rates on deposits and loans". In 1987, Wenzhou was identified as the only pilot city for interest rate reform in the country. In 2002, Wenzhou became the only comprehensive experimental area for financial reform in China, and the reform plan even explicitly proposed the liberalization of interest rates. In addition, Wenzhou also gave birth to the country's first private bank and the first joint-stock urban credit cooperative. Today, Wenzhou, where private capital is trapped, has once again become a pilot area for financial reform. In order to solve the problem of financing difficulties for small and medium-sized enterprises, it has found practical results. All parties also took advantage of this regional financial reform pilot to try new financial products, tools and channels. Although in Shanghai, where the operating environment is relatively good, the SME confidence index is also the lowest since last year. However, this financial reform is still full of expectations.

Breaking and establishing Wenzhou's financial reform

The 12 main tasks of Wenzhou's financial reform were unveiled, applauding, welcoming, disappointing, and sighing. Zhou Dewen, president of the Wenzhou Small and Medium Enterprise Development Association, who is regarded as the spokesperson of Wenzhou small and medium-sized enterprises, said that the goal of this financial reform is to break the monopoly financial system and allow private capital to enter the financial system; the second is to legalize the development of private lending; three It is to expand the field of private capital investment. Although he also believes that there are two major regrets in this reform, one is that the marketization of interest rates has not been opened, and the other is that private capital still cannot truly enter the financial market.

Liu Xingcheng, a lawyer from Beijing Zhongyong Law Firm, is a major participant in the legislative drafts of the Law on Promotion of Private Investment and the Law on Private Lending. He believes that Wenzhou's comprehensive financial reform plan brewed in the usury crisis is just a "comprehensive" of private financial types; among the 12 things that can be done in Wenzhou's comprehensive financial reform approved by the State Council, the pilot program of personal overseas direct investment is the largest The bright spot, which means that the free convertibility of RMB under the capital account has broken the ice.

Comparing one by one, the Wenzhou financial comprehensive reform plan approved by the State Council has few innovations, but Liu Xingcheng believes that this does not mean that the symbolic meaning of Wenzhou's financial reform is greater than the actual meaning. Because the State Council can neither give Wenzhou financial reform power beyond the law, nor can it give Wenzhou a policy that is not allowed to be implemented elsewhere. However, Wenzhou can explore a financial development path that conforms to economic laws by virtue of the "policy east wind". As Zhou Xiaochuan, President of the People's Bank of China, pointed out, Wenzhou's comprehensive financial reform is a process of continuous exploration. The national macro-management department should strengthen policy research and coordination, and Wenzhou's micro-subjects should exert their enthusiasm and subjective initiative to accelerate innovation. However, the reform results will ultimately be tested by practice.

In Liu Xingcheng's view, in order to achieve results in Wenzhou's financial reform, the central government introduced a competition mechanism. The People's Bank of China and the Zhejiang Provincial Government jointly launched a pilot program of rural financial reform in Lishui City, allowing Wenzhou City to be connected with neighboring Lishui City. Competition for financial reform. In order to achieve results in the financial reform of Zhejiang Province, the State Council recently approved the "Overall Plan for Guangdong Province to Build a Comprehensive Pilot Zone for Financial Reform and Innovation in the Pearl River Delta", allowing the two major economic provinces to compete in financial reform. "The central government is very determined to carry out financial reform, and the financial reform strategy is also very powerful. The goal is to cure both the symptoms and the symptoms." But whether the goal can be achieved in the end, he believes that this is another matter. A Wen businessman who is operating abroad bluntly said: "The actual problem has not been solved, and the state has no money to allocate. It is just empty talk. The current reform is only to collect some private capital to enter. After all, there is still a limit, and the state's allocation of funds has not increased. , the capital ratio of the local government in Wenzhou has not increased, so it still cannot solve the problem."

Wenzhou has always had the problem of "a lot of private capital, investment is difficult; there are many small and medium-sized enterprises, financing is difficult", Liu Xingcheng believes that this is Wenzhou Finance Difficulties in pilot reforms. In fact, private capital does not need the "privilege" to enter the financial industry. In order to break through the difficulties of Wenzhou's financial reform and break the state-owned monopoly of finance, it is enough for private capital to receive equal national treatment, that is to say, private capital obtains the freedom of investment and investment in financial institutions such as commercial banks, securities companies and insurance companies that comply with the law. equal rights. Liu Xingcheng said: "This is actually an issue of emancipation in the financial field."

As for the difficulty in financing small and medium-sized enterprises, Political commissar Lu, chief economist of Industrial Bank, pointed out that the key lies in information asymmetry. Banks determine pricing based on risk, so they need to know default rates, default loss rates, etc. from the historical behavior of enterprises. However, the credit reporting system as a financial infrastructure is not perfect, and the bank credit reporting system only has information such as credit cards, and a large number of corporate credit The information is not there, and the lack of data makes pricing difficult. The credit reporting system can only be a gradual accumulation process. Political commissar Lu believes that private financing is the best way to solve information asymmetry at present, and the sunshine nature of private lending lies in the recognition of the validity of contracts signed between people with full civil capacity. .

In addition, in the survey of "The Preferred Channel for Corporate Financing" conducted by the "CEConline" website, 17.93% chose "Government Support Fund", ranking second only to banks. But government funding is a drop in the bucket and is out of reach for most small businesses. Ma Hong, deputy director of the Shanghai Municipal Finance Office, pointed out that one of the measures to solve the financing difficulties of small enterprises is to build a government public service platform. Make wholesale loans to banks to reduce banking costs.

A new type of institution grows wildly

Recently, according to a survey conducted by the "CEConline" website, 33.70% of the respondents believe that Wenzhou's financial reform can effectively guide the flow of private capital to the development of the real economy, thereby alleviating the financing difficulties of small and medium-sized enterprises. question. Zhou Dewen pointed out that the diversification of financial institutions and financial products will enable Wenzhou's rich private capital to have legal market activity space in the three main aspects of deposits, loans and investment, thereby effectively guiding private lending capital to invest in the development of real enterprises. .

The diversification of financial institutions means breaking the bank's credit monopoly, and the country needs to issue the "Lenders Regulations" as soon as possible. Fu Xinhua, deputy director of the Shanghai Economic and Information Commission, believes that if the regulations are not promulgated, the usury crisis in Wenzhou will recur. As early as 2008, the relevant people of the People's Bank of China said that they would formulate the "Lenders Regulations" as soon as possible to open up the credit market, but the regulations have not been promulgated. The development of China's market economy has gradually formed two lending markets, one is a lending market where financial institutions with financial licenses issue loans, and the other is a private lending market where non-financial institutions without financial licenses issue loans. Liu Xingcheng analyzed that the main reason for the dystocia of the "Lenders Regulations" is that it is impossible to unify lending activities with financial licenses and private lending activities without licenses, and it is difficult to settle the game of interests.

However, regardless of the hesitation at the top, emerging non-financial institutions include guarantee companies, small loan companies, Financial leasing companies, pawn shops, etc., have already formed a complex interlocking situation in the private lending industry chain, and the risks cannot be underestimated. In the "China Financial Stability Report (2012)" released by the People's Bank of China in early July, it mentioned "pay close attention to the risks of non-financial institutions with financial functions". Industry insiders pointed out that the targets of close attention are guarantee companies, small loan companies and other companies that have not been strictly regulated, and the focus is on the more emerging and in the rough growth period of P2P network lending.

Renrendai, the earliest online lending platform in China, was established in 2007. At present, there are said to be thousands of them in the industry, including more than a dozen in Pudong, Shanghai alone. P2P online lending is aimed at small and micro enterprises, and the credit line is generally less than 300,000. However, the development is rapid, and the total transaction volume is even surprising for small loan companies. Take You Wo Loan, which was established in August last year as an example. According to general manager Yan Dinggui, the monthly transaction volume reached more than 6 million at the end of last year, and it reached 20 million in May this year. Basically, the transaction volume can be achieved in three or four months. double. According to the statistics of 13 large online lending platforms from the third-party statistics agency, the Internet Lending Information Alliance, the total transaction volume in June this year was more than 440 million; the data captured by the Internet Loan Home shows that the annual loan interest rate is basically 20% Up and down, the borrowing cost is about 2%~6%, which is far lower than the loan cost of institutions such as small loan companies. According to industry insiders, the current first-tier platforms, that is, those with a monthly transaction volume of more than 20 million, maintain a bad debt rate below 1%, while the bad debt rate of second- and third-tier companies usually reaches 1.8%.

Yan Dinggui said that P2P online lending is a channel of financing for small and micro enterprises, and it is not even mainstream. Although the current government generally feels supportive, such as allowing enterprises to add "financial information services" to their business scope, he admits The entire industry has hidden dangers because it is not regulated. The suspected fraud incident of Taojin Loan that happened not long ago has aggravated the outside world's doubts about online lending. Yan Dinggui pointed out that the biggest problem in this industry is the arrangement of funds. At present, the formulation of industry standards is being promoted, and you and Idai use technical means to realize the supervision requirements for funds, that is, an account management system is attached to the third-party payment platform. All investments and loans of customers are traded in their own accounts through the third-party payment platform, and do not enter the account of the online lending platform on the third-party platform, so that funds can be operated independently, while online lending can be a real information platform, only matching transactions between the two parties , earn transaction fees.

In addition, due to information asymmetry due to opaque information, debtors can borrow from online lending platforms in multiple places, resulting in excessive lending. On the blacklist of the online loan home statistics, the total arrears of a single borrower has exceeded 11.9 million yuan. Yan Dinggui believes that excessive lending and the lack of personal financial management ability will lead to accidents sooner or later, and online lending platforms will also face large amounts of bad debts. In fact, online lending platforms and small loan companies have an urgent need to inquire about the commercial credit information of enterprises, and commercial banks also have a demand for private lending data, which will help improve the integrity of credit information for enterprises and individuals. Yan Dinggui suggested that the exchange of data between the two parties will help solve the problem of opaque information and reduce the audit cost of online lending platforms.

Liu Xingcheng believes that for non-financial institutions without financial licenses such as guarantee companies, small loan companies, financial leasing companies, pawn companies, etc., legal supervision is enough, and there is no need for special regulatory agencies to supervise them. Those companies that follow the principle of good faith and pay attention to market rules can become stronger and bigger, and companies that are kidnapped and deceived will eventually be eliminated by the law and the market. However, P2P online lending is already a highly sensitive industry, and the risks it faces in the process of rapid growth are also increasing day by day. Otherwise, we can't wait for it to become bigger and stronger, and the whole industry will have to "chaos" to death.

Direct financing innovation fills the gap

According to Wang Shihao, chairman of Shanghai City Commercial Bank Fund Clearing Center, currently bank credit and bill financing account for about 75% of the total financing, and stock and bond financing account for about 25%. This means that the proportion of direct financing is extremely low, and the lack of direct financing, especially bond financing, restricts the development and innovation of SMEs. The survey data of the "CEConline" website also shows that only 4.32% of enterprises will issue bonds as their preferred financing mode. Zhou Dewen pointed out that the financing of Chinese SMEs relies too much on indirect financing, and has neglected direct financing for a long time. The responsibility lies not with the enterprises, but with "the system has lagged far behind the development of the economy."

However, SME bond financing has begun to experiment. In 2007, small and medium-sized enterprises entered the bond market for the first time in the form of collective bonds, which generally only large state-owned enterprises can issue corporate bonds, opening up a new channel for direct financing. In November 2007, "07 Shenzhen Small and Medium-sized Bonds" was officially issued. 20 small and medium-sized enterprises collectively issued corporate bonds of 1.03 billion yuan. The term of this bond is 5 years and the annual coupon rate is 5.70%. In December of the same year, Zhongguancun high-tech enterprise collective bonds were officially issued, and 4 small and medium-sized enterprises collectively issued bonds of 305 million yuan with a term of 3 years and an annual coupon rate of 6.68%. Due to the unified guarantee method, collective bonds can effectively reduce the financing cost of enterprises. If calculated at a 3-year coupon rate of 4.5~5%, the annual comprehensive cost is about 7.4%, which saves the financial cost of the enterprise, and the bond interest can also be paid before tax. Include cost.

A person from an investment bank of a securities firm said that due to the small quantity and relatively high yield, investors responded well to SME bonds. However, he also pointed out that the scale of collective debt has been very small. It is difficult to find multiple high-quality enterprises to package together, and the packaging method is not conducive to making judgments on the credit risk of a single enterprise. Although the companies that can issue bonds are the best among the best, and most of them are guaranteed, the repayment risk of small and medium-sized enterprises is still relatively high. At the beginning of this year, Beijing Dijie Communication Equipment Co., Ltd., one of the issuers of the "2010 Zhongguancun High-tech SME Collective Bond", issued an announcement stating that due to the deterioration of business conditions, many loans were overdue, bank accounts were seized, and all debts were repaid on their own. On December 30, 2011, it applied to Zhongguancun Technology Guarantee Co., Ltd., the bond guarantor, asking it to fulfill its guarantee responsibility and ensure the performance and payment of principal and interest. According to industry insiders, it is rare for corporate bonds to be repaid by guarantee companies with principal and interest.

In June 2012, the SME private placement bond made its first appearance amid the welcome sound. As of June 28, the Shanghai and Shenzhen exchanges have successfully filed 19 and 10 private placement bonds for SMEs, with a total scale of 2.313 billion yuan. The size of each private placement bond is 20 million to 250 million yuan, the interest rate is 9.5% to 13.5%, and the term ranges from 1 to 3 years. Relatively speaking, the threshold for private placement bond issuers has been further lowered, and the filing system is adopted, which is more market-oriented and has a short operation cycle. Compared with the interbank market, the exchange market is also relatively small.

Industry insiders are optimistic about the innovation space of private debt. For example, overseas private placement bonds, as a financing means in corporate mergers and acquisitions, reduce acquisition costs. However, the relevant investment bankers also expressed that they should take a calm view of this tool. At present, the domestic merger and acquisition market itself is in its early stage, and the application of private debt may not be able to start immediately.

Another room for innovation is that private equity convertible bonds are the first in China to apply to non-listed companies. The "Small and Medium Enterprises Private Bond Business Pilot Measures" promulgated by the Shenzhen Stock Exchange and the Shanghai Stock Exchange has made it clear that issuers can set up private equity bonds with options or convertible terms. Li Jianhao, CEO of Kaimen Capital, has more than 20 years of overseas investment banking experience. He said that convertible private equity bonds are a flexible financial tool for both issuers and investors. He predicts that in the next 10 years, the private bond market will reach at least RMB 200 billion, of which convertible private bonds are conservatively estimated to account for at least 25%.

Although the cost of private placement bonds is low relative to the cost of bank borrowings and trust products, issuance costs are still too high for companies with relatively small issuance scales. For example, for a private placement bond with an issue size of RMB 50 million or more, the cost is about 3% of the par value, including due diligence fees, fixed fees required for listing, legal fees and accounting fees. Li Jianhao pointed out that the smaller fundraising amount is not conducive to the success of the issuance. Investment banks tend to ignore small companies and prefer strong unlisted companies, because the latter usually have high-quality mortgages, good balance sheets and principal guarantees.

Therefore, he suggested that it may be difficult for small companies to issue private placement bonds in the early stage. Convertible private placement bonds can compensate for the risks brought by a lower level of asset scale and cash flow, and investors can take the opportunity to develop and explore private equity bonds. Small business with good credit history and cash flow. The use of convertible private placement bonds will provide incentives for investors - once the value of the enterprise increases significantly during the duration of the bond, investors can convert the convertible bonds they hold into shares and become shareholders.

As long as small and medium-sized enterprises with good cash flow and good growth prospects, in Li Jianhao's view, there is the potential to issue convertible private equity bonds. Convertible private equity bonds not only reduce the financing difficulty and debt cost of enterprises, but also promote the mutually beneficial relationship between investors and investee enterprises. Compared with the traditional bank loans that are only based on the current situation of small and medium-sized enterprises, investors of convertible private bonds, including PE/VC, pay more attention to the future development prospects of enterprises. Investors will also introduce professional knowledge for enterprises to help them improve. Competitiveness and expansion, in turn, increase the value of convertible bonds, and investors cooperate with a fixed investment bank to provide listing services for companies.

However, most of the currently issued private placement bonds are simple in design, and only one is said to have a convertible clause. An investment banker of a securities firm believes that at present everyone is afraid of trouble. If such a company IPOs in the future, there will be uncertainties in terms of shares and listing time. Moreover, for the new thing of convertible private equity bonds, all parties in China have insufficient operating experience. . Li Jianhao also admitted that convertible private placement bonds are complicated to a certain extent, and a more transparent market must be established. An accurate and transparent database must be established to conduct in-depth investigations into the real balance sheets, changes in credit records of bond-issuing companies, and corporate investment guidelines. Collecting all historical financing records of eligible businesses also requires improved operational techniques, pricing strategies and legal skills.

Flexible and win-win convertible private placement bonds

Text/Li Jianhao, CEO of Kaimen Capital

The advantages of convertible private placement bonds are: 1. The coupon rate is usually lower than that of pure bonds, which can reduce the financial burden of the company; second, to attract equity investors, in the case of unlisted, companies can use convertible bonds to attract equity investors and improve the liquidity of corporate stocks; third, Fundraising is relatively easy, and convertible bonds can attract investors with different risk preferences if they are traded separately. Fourth, adjust equity capital and debt capital: Enterprises can adjust the proportional relationship between equity capital and debt capital through convertible bonds.

The basic contents of the terms that small and medium-sized enterprises need to consider when issuing privately offered convertible bonds include: coupon (interest rate), exercise price converted into corporate equity, early redemption terms, early repurchase terms, and the assets used as collateral include Company shares. Companies should set benchmarks for these terms so that when designing specific investment terms, they can be tailored and used flexibly to meet the needs of both investors and companies. In other words, different combinations of terms can bring about a variety of options and bring greater tangency to financing activities.

A basic convertible bond allows PE/VC funds to become senior debt holders and get some fixed income before deciding whether to convert to equity at a later stage. At the same time, as a corporate creditor, the principal repayment nature of convertible bonds provides stronger protection than pure equity investments with repurchase clauses. When adopting the convertible private placement bond scheme, the interest rate and exercise price alone have brought great flexibility and investment negotiation space to PE/VC funds and issuers. If a company wants to offer a higher strike price, it must offer a higher interest rate accordingly, and vice versa. In fact, enterprises can determine the corresponding exercise price according to the level of interest rate they can afford.