Investment Strategies for Financial Leasing Bonds: A Review and Outlook

In terms of market capacity, as of the end of 2021, there are 99 financial lease bonds in the market, with a total scale of 199.550 billion, and most of the bond maturities are 3 years; the overall rating of issuers is higher, and it shows a certain head effect. In terms of issuers, the issuers of existing financial lease bonds are mainly bank-based gold leases. In terms of the subordinated attributes of bonds, there are 6 subordinated bonds in the existing debt, which accounts for a relatively low proportion.

In the primary market, a total of 32 financial lease bonds were issued in the market in 2021, with a total scale of 67.850 billion yuan, of which bonds were issued in ten months of the year. The interest rate of financial lease bonds issued is concentrated at about 3.50%. The term of the newly issued bonds is 3 years, the issuance methods are all public offerings, the issuers have a higher rating, no special terms, and no subordinated bonds.

In the secondary market, the overall valuation of financial lease bonds, ordinary bonds and subordinated bonds in 2021 showed a downward trend, and the overall valuation of non-bank gold lease bonds was higher than that of bank gold leases. In terms of transaction amount, the total transaction amount of financial leasing bonds in the market for the whole year was 206.787 billion, and the turnover rate was concentrated between 5 and 15% in most months of the year, and the transaction liquidity level was relatively low.

In terms of investment strategy, for high-rated entities, most of their shareholder backgrounds are large state-owned enterprises and central enterprises, with strong shareholder strength and relatively cautious capital investment, even in extreme cases, they can get stronger support from shareholders, so we believe that investment targets should focus on gold lease bonds above AA+ level. Compared with the ordinary bonds of securities companies and the ordinary bonds of commercial banks, the current AAA-grade entity-rated bonds of financial leasing have a higher yield level, have a certain investment cost performance, and have a certain allocation value; while the valuation of subordinated bonds has no significant advantages, and the allocation value is relatively average.

In the early stage, our financial debt investment strategy series report has sorted out the investment strategies related to bank financial bonds, bank capital instruments, various bonds of securities companies and capital supplementary instruments of insurance companies, this article is the fifth part of the series of reports, mainly to explore the characteristics of financial leasing company bonds and market status, and sort out the investment opportunities behind them.

1. Basic information of financial leasing companies and financial leasing bonds

1. Classification of leasing companies

According to the Measures for the Administration of Financial Leasing Companies (CBRC Circular [2014] No. 3), a financial leasing company refers to a non-bank financial institution approved by the CBRC to mainly engage in financial leasing business. Among them, financial leasing refers to the transaction activity in which the lessor leases the leased property obtained from the supplier to the lessee for possession and use according to the contract according to the choice or approval of the leased property and the supplier, and collects rent from the lessee. It should be noted that there is a certain difference between financial leases and operating leases: according to the Accounting Standard for Business Enterprises No. 21 - Leases issued by the Ministry of Finance (Cai Hui [2018] No. 35), financial leases essentially transfer almost all the risks and rewards associated with the ownership of the leased assets; while the operating lease only transfers the right to use the asset, but does not transfer the risks and rewards associated with the ownership of the asset. According to the cbrc's "Measures for the Administration of Financial Leasing Companies" as a financial leasing company, "a financial leasing company mainly operates financial leasing business", which means that if the company that only carries out the leasing business is not a financial leasing company. In addition, according to their own categories and regulatory authorities, financial leasing companies and financial leasing companies also need to distinguish. Financial leasing companies are financial institutions, which are generally large in scale, financing difficulties, financing costs are relatively low, the upper limit of leverage multiples is higher, and are subject to stricter supervision; while financial leasing companies are non-financial institutions, which were originally supervised by the Ministry of Commerce and then supervised by the Banking and Insurance Regulatory Commission, and their regulatory documents are currently the Interim Measures for the Supervision and Administration of Financial Leasing Companies.

2. Financial leasing regulatory policies

The regulatory documents for financial leasing companies are mainly the Administrative Measures for Financial Leasing Companies (No. 3 [2014]) issued by the CBRC on 13 March 2014.

Investment Strategies for Financial Leasing Bonds: A Review and Outlook

In addition, the document stipulates that the promoters of financial leasing companies include commercial banks with independent legal personality registered in China or abroad, large enterprises registered in China whose main business is to manufacture products suitable for financial leasing transactions, financial leasing companies registered outside China and other promoters recognized by the CBRC. The document has different requirements for three types of promoters:

3. Classification of financial leasing companies

According to the classification of the company's shareholders, financial leasing companies can be divided into banking systems and non-banking systems, of which the business development of the banking system can use the outlets of affiliated banks, and can obtain more financier credit information, the expansion is faster, with the advantages of stable financing sources, low costs, large capital scale, convenient business expansion, and more adequate information, which have obvious advantages in the leasing industry.

4. Development of financial leasing bonds

In September 2009 Chinese Min min bank and the China Banking Regulatory Commission jointly issued [2009] No. 14 announcement, allowing financial leasing companies and car rental companies to issue financial bonds. Chinese Min min bank said that allowing financial leasing companies to issue bonds is conducive to broadening their source of funds, promoting the development of financial leasing business, and enhancing their ability to support the development of small and medium-sized enterprises.

In May 2014 Chinese Min min bank and the China Banking Regulatory Commission jointly issued [2014] Announcement No. 8, which further regulated the issuance of financial lease bonds. In contrast, Announcement 8 of [2014] has relaxed certain conditions for release compared with Announcement 14 of [2009].

In September 2015, the General Office of the State Council issued the Guiding Opinions on Promoting the Healthy Development of the Financial Leasing Industry (Circular No. 69). The document states that "eligible financial leasing companies are allowed to list and issue preferred shares and subordinated bonds, and enrich the channels for financial leasing companies to replenish their capital." Eligible financial leasing companies are allowed to raise funds through multiple channels through the issuance of bonds and asset securitization."

2. Market situation of financial lease bonds in 2021

1. The situation of the existing bond market

As of December 31, 2021, there were 99 existing financial lease bonds in the market, with a total scale of 199.550 billion yuan. In terms of issuance term, 18 Tibet Lease Bond 01 is the only bond with a maturity of 13 years, in addition to 4 gold lease bonds with a maturity of 5 years, 6 with a maturity of 10 years, and the remaining 88 bonds with a maturity of 3 years. In terms of ratings, the overall rating of financial leasing bonds is relatively high, and all existing bonds are basically above A, with only two BBB-grade bonds, of which AAA-grade bonds account for the largest proportion, with a total number of 89, accounting for 90%; the total scale is 184.850 billion, accounting for 92.63%.

In terms of maturity time, most of the financial lease bonds are concentrated in the past three years, the bonds that have not matured in 2025 and 2026, and 7 in 2027 and later, the number and scale are small. From 2022 to 2024, the scale of existing bonds due was 186.850 billion, accounting for 93.64%, while the scale of existing bonds due after 2027 was 12.700 billion, accounting for only 6.36%.

As of the end of 2021, the balance of the 65 surviving bonds of the bank-based financial lease reached 143.250 billion, accounting for 71.79% of the total at the end of the same period; the balance of the existing debt scale of non-bank financial leases was 56.300 billion, accounting for 28.21% of the total at the end of the same period.

The issuers of existing financial lease bonds have shown a certain head effect. Among the issuers of the banking system, as of the end of 2021, the scale of the gold lease bonds of the top eight bank systems was as high as 115.100 billion, accounting for 80.35% of the total number of bank gold lease bonds at the end of the same period, of which bocom leasing, ICBC leasing and CMB leasing bonds were the highest, all of which were more than 20 billion; among the non-bank issuers, the scale of the existing bonds of the top five non-bank gold lease companies reached 33.000 billion, accounting for about 58.61%.

In addition, there are 6 subordinated bonds among the existing bonds, namely 20 CMB Leasing Grade II, 18 BOCOM Leasing Grade II, 17 Industrial Leasing Grade II, 20 Everbright Leasing Grade II, 20 SPDB Leasing Grade II and 18 Guoxing Leasing Grade II 01. All six bonds are issued for a period of 10 years. However, the overall issuance scale is relatively low, only 9.700 billion yuan, accounting for only 4.86%.

2. Primary market situation

In the primary market, a total of 32 financial lease bonds were issued in the market in 2021, with a total scale of 67.850 billion. Among them, there are ten months of bond issuance throughout the year, and the largest bond issuance from April to June is 12.500 billion, 11.550 billion and 13.300 billion respectively.

In terms of issuance interest rates, the interest rate of financial lease bonds issued in 2021 is relatively concentrated, roughly between 3.00% and 4.50%, concentrated at about 3.50%, and the trend is stable. Among them, the interest rate of non-bank financial lease bonds is higher than that of bank financial lease bonds.

In terms of issuance period, all 32 bonds issued in 2021 have a maturity of 3 years, and the issuance methods are all public offerings, with no special terms. In terms of issuer ratings, all issuers are rated above AA level, of which only one AA+ bond is rated, and the rest are AAA-rated bonds. In terms of guarantee clauses, only 21 Hubei Leasing Bonds 01 issuers provide full unconditional irrevocable joint and several liability guarantee guarantees, and the rest have no guarantee clauses. In addition, there are no subordinated bonds in the bonds issued in 2021.

3. Secondary market situation

In the secondary market, the overall valuation of financial lease bonds, ordinary bonds and subordinated bonds in 2021 showed a downward trend. As of the end of 2021, the valuation of medium bonds in financial lease bonds was 3.15%, and the overall valuation of AA+ bonds was higher than that of the market, but the gap was gradually narrowing; in addition, the valuation of non-bank gold lease bonds was higher than that of bank gold rents.

In terms of individual bonds, the two bonds of Tibet Leasing (18 Tibet Leasing Bonds 01 and 19 Tibet Leasing Bonds 01) were overvalued due to the default of the shareholders (Dongxu Group Co., Ltd.), and then the bond rollover caused the main body's rating to be downgraded to BBB (not counted in the table). In addition, huarong gold lease of two existing bonds 20 huarong lease bond 01 and 19 huarong lease bond 01 yield is also relatively high, which is mainly due to the shareholder China Huarong Group's delay in disclosing the annual report and the huge losses that have subsequently exploded, resulting in its own credit qualifications being affected. At the same time, China Huarong issued an announcement on November 17, 2021, saying that it intends to publicly transfer the 79.92% equity of Huarong Financial Leasing, but as of now, it has not been able to find relevant progress on this transfer, and the largest shareholder of Huarong Leasing is still China Huarong Group. After the Huarong incident, Moody's and Fitch downgraded the rating of Huarong Leasing Entity, but CCXCI considered that Huarong Leasing was still operating smoothly after the Huarong Incident and believed that Huarong Leasing was limitedly affected by this incident, so it maintained huarong leasing entity rating as AAA.

In terms of transaction amount, the transaction amount of financial leasing bonds in the market totaled 206.787 billion yuan in the whole year, and the transaction amount varied greatly during the year, and the turnover from March to August was significantly higher than that of other months, and the turnover in March had a significant increase. The turnover rate is concentrated between 5% and 15% in most months of the year, the trend is closer to the trend of the transaction amount, the turnover rate rose sharply in February and March, showed a downward trend after reaching the highest value in March (16.76%), the largest decline in August-September, and the lowest value (5.44%) in September and then slowly recovered.

3. Investment strategy of financial leasing bonds

Up to now, only one financial leasing company has had a bond rollover, which is Tibet Gold Leasing, mainly due to the gradual deterioration of its shareholder Dongxu Group's long-term fundamentals and the negative impact of the macro environment.

We consider that in terms of risks, first, the current epidemic has not ended the economic impact, in the context of weak economic growth, some of the aggressive golden rents may be exposed to risks, resulting in higher yields; second, individual leasing companies themselves or shareholders appear "gray rhinoceros" or "black swans" (such as Huarong leasing), resulting in market sentiment panic, making the yield higher. For high-rated entities, most of their shareholder backgrounds are large state-owned enterprises and central enterprises, and the shareholders have strong strength and relatively cautious capital investment, even in extreme cases, they can get stronger support from shareholders. Therefore, we believe that investment targets should focus on gold lease bonds above AA+ level.

In terms of specific investment strategies, we compare the yield levels of financial leasing ordinary bonds with ordinary bonds of securities companies, ordinary bonds of commercial banks, and subordinated bonds of financial leasing with subordinated bonds of securities companies and subordinated bonds of commercial banks. Overall, in the past year, the trend of ordinary financial leasing bonds is similar to that of ordinary bonds of securities companies and ordinary financial bonds of commercial banks; the trend of subordinated bonds of financial leasing is similar to that of subordinated bonds of securities companies and subordinated bonds of commercial banks. According to the latest data, compared with the ordinary bonds of securities companies and the ordinary bonds of commercial banks, the AAA-rated bonds of financial leasing ordinary bonds have a higher yield level, have a certain investment cost performance, and the current allocation value is higher. The valuation of subordinated bonds has no significant advantages, and the allocation value is relatively average.