The paradox of financing difficulty of private enterprises : a study on the relationship between bond financing and default rate = 民营企业融资难的悖论 : 债券与违约率关系研究

Abstract

In recent years, while the issuance of corporate bonds in Mainland China has grown rapidly, the number of bond default events has also increased annually. It is easy to understand that private enterprises account for the majority of publicly reported bond defaults due to differences in ownership backgrounds. The data behind this phenomenon show that the bond financing of defaulted private enterprises accounts for a relatively high proportion of their liabilities. So, does this imply that the probability of bond defaults is influenced by the bond financing ratio (i.e., the proportion of corporate bond financing to corporate liabilities)? What is the relationship between bond financing ratio and corporate bond defaults? For private enterprises, will a higher bond financing ratio lead to a higher default probability? And what causes heterogeneity in the relationship between the two in enterprises with different ownership structures? Based on this background, this paper uses the credit bond data of 3,341 Chinese enterprises from 2014 to 2021 and employs methods such as the Cox model to empirically examine the relationship between bond financing ratio and the probability of corporate credit bond defaults, as well as explore the underlying mechanisms. The main conclusions include: Factual analysis finds that: (1) During the period of 2017-2021, the average bond financing ratio of all enterprises in the previous year was 15.66%, with defaulted enterprises having a bond financing ratio of 8.90%, approximately 6.85% lower than non-defaulted enterprises. (2) In different years, the bond financing ratio of non-defaulted enterprises was significantly higher than that of defaulted enterprises. (3) The average bond financing ratio of state-owned enterprises in the previous year was 16.56%, with non-defaulted enterprises at 16.60% and defaulted enterprises at 8.53%. The difference between non-defaulted and defaulted enterprises was 8 percentage points, significantly higher than for all enterprises. (4) The average bond financing ratio of private enterprises was 7.35%, with non-defaulted enterprises at 7.11% and defaulted enterprises at 9.16%, indicating that the bond financing ratio of defaulted private enterprises was higher and positively correlated with the default rate of private enterprise bonds. Theoretical analysis finds that: (1) Generally speaking, the bond financing ratio of enterprises does not directly affect the probability of bond defaults. (2) From the perspective of boundary conditions, differences in the size, attributes, or management of enterprises, differences in their business management or financial conditions, and differences in the external market environment they face will affect the relationship between bond financing ratio and bond default probability. (3) From the perspective of influencing mechanisms, the bond financing ratio will increase the probability of corporate credit bond defaults directly by causing excessive indebtedness, short-term debt usage for long-term purposes, blind expansion in the main business, over-investment in business diversification and insufficient internal control, as well as encountering financial institutions "withdrawing loans and cutting off debt" in bond refinancing and loan renewal issues. (4) The cyclical impact of macroeconomic policies, as the Chinese financial regulatory authorities initiated the "shadow banking" governance in 2017 and introduced a series of new regulatory policies with the "Guiding Opinions on Regulating the Asset Management Business of Financial Institutions" as the top-level document, has gradually increased the differences in bond issuance conditions between state-owned enterprises and private enterprises, leading to the "State-owned enterprises expanded, but private enterprises declined" situation in bond issuance. Cases of forced defaults by private enterprises due to difficulties in bond refinancing upon maturity have occurred from time to time, and the shrinking trend of private enterprises in the bond market has not eased. Empirical research finds that: (1) Consistent with theoretical analysis, there is usually no direct relationship between the bond financing ratio and whether a company will default after issuing bonds. (2) If the sample is divided into state-owned enterprises and private enterprises, there is a significant positive correlation between the two in the private enterprise sample, meaning that as the bond financing ratio increases, the probability of bond default for private enterprises also increases. (3) After several robustness tests and addressing endogeneity issues, the above conclusions still hold. (4) The impact of the bond financing ratio on the probability of corporate bond default has boundary conditions. The increase in cash flow from a company's business operations or Short term loans can improve its repayment capacity and risk resistance, helping to reduce the impact of the bond financing ratio on the bond default rate; external supervision can also lower the impact of the increased bond financing ratio on the probability of corporate bond default; however, factors such as the economic development status of the region where the company is located, the local government's attention and assistance to the company, have not statistically reduced this effect in the sample data. Interview research findings that: The interview study mainly investigates the intrinsic mechanisms of how excessive bond financing for private enterprises might lead to corporate bond defaults, from aspects such as excessive indebtedness, short-term debt usage for long-term purposes, blind expansion in the main business, excessive investment for business diversification, and insufficient internal control. (1) An increase in the bond financing ratio can lead to an overestimation of a company's creditworthiness, resulting in excessive indebtedness, increasing the company's debt burden, and ultimately affecting the risk of bond default. (2) An increase in the bond financing ratio may encourage companies to use short-term debt for long-term purposes, with debt maturity mismatches and liquidity risks associated with reissuing bonds directly leading to bond defaults. (3) A higher bond financing ratio can induce companies to blindly expand, and diversification in business and industries can greatly increase a company's operating risks, thus increasing the probability of bond default. The emergence of private enterprise bond defaults since 2017 is directly related to the aggressive expansion during China's relatively loose monetary policy period between 2014-2016. (4) An increase in the bond financing ratio may stimulate excessive investment by companies, which leads to both an increase in net cash outflow from investment activities and interest-bearing liabilities, and private enterprises often operate in industries with overcapacity or strong competition in the midstream and downstream of the supply chain. Overcapacity and intensified competition result in a decline in investment returns, and cash flow from business operations may not meet debt repayment needs in the short, medium, or long term. (5) An increase in the bond financing ratio may cause insufficient internal control within the company, negatively affecting production and operation, and "using debt to support debt, using loans to repay loans" increases the risk of bond default. Finally, based on the above research conclusions, regarding how to prevent and resolve private enterprise bond default risks, as China's financial system continuously improves the function of the capital market and increases the proportion of direct financing, this paper proposes several countermeasures to address the issues of private enterprise financing difficulties and improve the "State-owned enterprises expanded, but private enterprises declined" problem in the bond market: (1) In terms of funding sources, continue to encourage private enterprises to use multi-level capital market financing methods such as issuing bonds, stocks, convertible bonds, and asset-backed securities, reduce the dependence on credit bond varieties. Design the structure of equity and debt financing according to their own strategic planning and optimize the structure of basic financing methods such as public bond issuance and bank offline financing based on the company's public influence and other resource endowments. (2) From the perspective of corporate fund utilization, regulate the use of funds by bond-issuing enterprises, prioritize management of cash flow from business or investment activities associated with public bond issuance, establish a system for prioritizing bond maturity repayments, and build firewalls for financial management matters involving "public image" and public credit ratings. (3) In terms of business management, continuously adjust and optimize corporate management strategies, enhance the resilience of the company's main business and financial performance, and reduce the adverse effects of increased bond financing ratios on corporate bond refinancing and public information. (4) From the perspective of government regulation, first, continue to promote financial innovation in private enterprise equity and debt financing, launch and promote differentiated pricing credit bond varieties around the multi-level capital market system, cancel the multiple approvals for corporate bond issuance while strengthening information disclosure supervision; second, improve support policies and institutional arrangements for the issuance and circulation of private enterprise bonds, including introducing high-yield bond investor groups with appropriate risk-bearing capacity such as private equity funds, M&A funds, and non-performing asset management institutions, and expanding the application scope of "Private enterprise bond financing support tools", credit risk mitigation warrants (CRMW), and local policy financial institution guarantees; third, establish market-oriented tools for hedging credit risk and managing credit bond liquidity risk for private enterprise bond investors, such as adopting credit default swaps (CDS) products in the US bond market. (5) From the perspective of social and judicial supervision, fully leverage the positive role of external supervision mechanisms. On the one hand, establish dynamic regulatory and long-term supervision mechanisms for bond issuance-related intermediary agencies (legal due diligence, financial audit, credit rating, etc.), and strengthen the supervision of information disclosure for bond-issuing enterprises throughout the entire process; on the other hand, strengthen investor protection, increase the punishment for illegal and non-compliant bond issuance, and strengthen the constraint of social public entities on bond-issuing enterprises.