China National Materials Group Corporation (SINOMA) on Tuesday became the first domestic company to issue debenture bonds without bank guarantee this year amid strong government intention to buoy the corporate bond market.

The five-year bond worth 500 million yuan (about 71 million U.S. dollars) in total has a fixed face annual interest rate of 6.4 percent. It will be spent on eight projects involving the development of non-metallic mineral resources and inorganic and non-metallic new materials. Total investment will be 1.846 billion yuan.

Given "AA" rating by the China Chengxin International Credit Rating, it is also the third debenture bond ever allowed by the government since China officially endorsed the corporate bond market as an important financing tool supplementary to bank loans by promulgating management rules on enterprise bonds in 1987.

For fear the default of corporate bond issuers might jeopardize social stability, regulators have long been requiring commercial banks to provide guarantees for corporate issuers. The side-effects, however, as industry analysts pointed out, were the potentially fragile bank system and the stagnancy in corporate credit development.

Debenture bonds issued by CITIC Group in 2005 and China Three Gorges Project Corporation in 2006, which involved 9 billion yuan and 3 billion yuan, respectively, received only nonchalant response.

Sources with the underwriter CITIC China Securities recognized the better atmosphere for corporate bond issuance as the National Development and Reform Commission (NDRC), the country's top economic planner in charge of the examination and approval of enterprise bonds, has listed expanding the issuance of debenture bonds as "one of the tasks worth doing better" to facilitate the marketization of local bond markets.

With the approval of the State Council, China's Cabinet, the NDRC released a document in early January, promising it would either approve or oppose bond issuance within three months since the arrival of applications. Rejections must be expounded.

The instrument also scrapped the 17-year-old annual check on the aggregate scale of corporate bonds issuance, which, bond analyst Gao Zhanjun at CITIC Securities said, "virtually removed the yearly issuance ceiling and cleared the system hindrance for the development of the corporate bond market".

Under the old mechanism, corporations must dance to the tune of the NDRC by submitting applications at the designated time period, usually once a year, waiting half a year or longer for examination and approval and biting their nails for the loss of flexibility in budgeting the fund.

As bond issuance tended to cluster in the same period of time, issuers could hardly take advantage of the direct financing tool while investors were left stewing for months over bond shortage. "One wet blanket was that the approval often came too late to finance the targeted projects," Gao said.

Apart from the SINOMA, Dalian Port Corporation Limited was also approved to issue bonds as of Tuesday. The bonds, available through Thursday and guaranteed by China Construction Bank Dalian Subsidiary, are worth 3 billion yuan. They mature in 10 years and have a face yearly interest rate of 5.35 percent.

This was the first corporate bond ever issued by a local port company. It took less than two months for the state-owned company to get the issuance approval.

Analyst Qin Juan of Chang Xin Asset Management said bank guarantees would gradually make way to credit ratings in the future as the new instrument clarified that companies may issue debenture bonds, mortgage bonds and third party guaranteed bonds.

As the current market still favored bonds with bank guarantees, analysts expected the interest rate spread between corporate and government bonds with the same term of maturity to expand in future.

Statistics showed such a spread widened from 0.64 percent to 1.76 percent early last year to 0.95 percent to 2.33 percent in December because of the ripple effect of the U.S. subprime mortgage crisis.

Director Xu Lin with the NDRC's Fiscal and Financial Department maintained interest rates should serve as a much more significant leverage in corporate bond issuance while the pricing role of intermediaries, especially credit rating agents, should be strengthened.

"Interest rates should mirror the quality and risks of corporate bonds. The additional bank guarantees however have resulted in almost unanimous credit ratings and put a premium on the bond issuance by enterprises with average financial standing," he said.

The official told the media in early March that the year's new corporate bond supply would expand no less than 55 percent from last year's 101.5 billion yuan to somewhere close to 160 billion yuan.

Yan Yan, China Chengxin Securities Rating deputy board director, predicted more companies would choose direct financing such as corporate bonds this year to cope with succinct bank loans amid tight monetary policy.

He also foresaw progress this year in the opening up of domestic bond market to multinationals and overseas financial institutions and foreign governments. Only a few multinationals and foreign governments might be brought in at the early stage, with their maximum issuance scale at 30 billion yuan, he said.

(Xinhua News Agency April 9, 2008)