REGULATORS in China are encouraging corporate bond exchanges as a way to mitigate the risks of companies defaulting as businesses struggle to meet repayment obligations in a pandemic-hit economy.

The Shanghai and Shenzhen stock exchanges have published rules on the exchange of corporate bonds, formalizing a practice under which issuers can offer bondholders new bonds in exchange for maturing debts.

The move, under the guidance of the China Securities Regulatory Commission, is aimed at creating more tools for risk management in the bond market and maintain market order, according to the two exchanges.

China’s 25 trillion yuan (US$3.53 trillion) corporate bond market has become an increasingly important funding channel for Chinese companies and government-backed vehicles, but it has limited experience with distress or default.

The new rules put a spotlight on the issue of bond defaults in China, where Chinese companies have previously come up with novel tactics to avoid the notoriety and consequences of missing repayments publicly.

Such tactics have included slashing coupons, extending payments, making private payment arrangements with bondholders, or forcing investors into a swap offer.

Under the new rules, companies must make exchange offers to all bondholders, and the deal must be made on a voluntary and equal basis, without hurting investor interest. In addition, details of the bond exchange plans must be published ahead of the offer.  (SD-Agencies)