| Since the launch of short-term financing bonds in2005, China’s corporate bondmarket has entered a stage of rapid development. However, as the development time isshort, the credit enhancement and other risk management system have not kept up withthe pace of the rapid development, the bond market began to appear the downwarding ofcredit rating and the accumulation of credit risk. In2012, the People’s Bank of Chinaissued “the business practices of credit enhancement institution" and "the riskmanagement norms of institution "(YinFa [2012] no.204), formally making creditenhancemen clear, institutionalized and standardized. Credit enhancement has animportant and far-reaching influence on our corporate bond market, improving the bondrating, lowing the financing costs. At the same time, it is conducive to the scientificmeasurement, effective monitoring and comprehensive supervision of the bond marketrisks. Also it can help to achieve credit risk-sharing mechanism and maintain the stabilityof the financial system.This paper followed the below research framework:" Theory and Situation Analysis-basic credit enhancement-Credit derivatives Credit Enhancement-Structured CreditEnhancement-Foreign Reference-Suggestions". It used the contract mechanism theory,incentive theory and risk management theory and learnt from foreign experience, makingevaluation on the methods, principle and effect of the credit enhancement in China.Finally the paper put forward countermeasures and suggestions such as innovating theway of credit enhancement, developing the mechanism.First of all, this paper defined the related concepts of the corporate bonds creditenhancement. The "corporate bonds" in this paper refers to the securities that enterprisesissued in accordance with legal procedures, agreed debt service within a certain period.Generally it refers to the securities that issued by non-financial companies, mainlyincluding short-term financing bonds, medium-term notes, enterprise bonds andcorporate bonds. And the "credit enhancement" refers to a kind of professional financialservices in order to improve the credit rating and enhance the performances, so as to todisperse and transfer the credit risk. Specifically it includes the ways of guarantee, creditderivatives, structured finance products or laws, regulations, policies, industryself-disciplines and other effective mehods. Credit enhancement methods can be dividedinto basic credit enhancement, credit derivatives credit enhancement and structuredcredit enhancement according to the principle. Basic credit enhancement includes assets mortgage/pledge and guarantees; credit derivatives credit enhancement includes creditdefault swaps (CDS), credit risk slow-release tools (CRM) etc.; structured creditenhancement includes prime/secondary structure, first/middle/secondary structure,priority/middle/equity structure etc.Secondly, this paper analyzed the way, principle and utility of the basic creditenhancement. Studies have found that credit enhancement can effectively disperse andtransfer the credit risk of corporate bond, improving its credit rating and reducing itscredit spreads as well as its distribution costs. Credit enhancement changed the averagerating of small and medium enterprises collective notes(SMECN) from BBB to AA+, atotal of eight grades, dropping an average of298basis financing points. Comparing andanalyzing the credit rating of short-term financing bonds, medium-term notes, corporatebonds and other bonds before and after the credit enhancement, we can know thatcorporate bond credit enhancement has a significant effect, of which the short-termfinancing bonds work the most significantly, then the medium-term notes, and thecorporate bonds is the last. In this paper, the effect credit enhancement on bond liquidityis not completely consistent with the theory, therefore it still need further research.Again, this paper analyzed the ways, principle, cost and utility of the creditderivatives credit enhancement. Estimating the cost of credit derivatives based on theJarrow-Turnbull model,it showed that when measuring the price of credit riskmitigation credentials (CRMW) it is more suitable for treasury bonds interest rates andpolicy debt-financed interest rates acting as the risk-free interest rate. CRMW createprice≈CRMW cost-estimating price (while the policy debt-financed interest rates actingas the risk-free rate)<CRMW cost-estimating price (while the treasury bonds interestrates acting as the risk-free rate)<CRMW marked bond trading spreads. The results ofcost estimating on credit derivatives matched its credit rating and deadline, so the costestimating is reasonable and effective. In addition, the use of credit derivatives can toincrease the amount of loans for commercial Banks when their risk-weighted assetsmaintain steady. By measuring this part of the increased loans to calculate the creditenhancement utility, the results show that CDS can be increase about62%more targetloans while the risk-weighted assets keep steady.Finally, this paper analyzed the methods, principle and effects of structured creditenhancement. By using incomplete information static game model to study thepriority/secondary structure,it found that adding middle level can raise the utility of jointissuers and the investors. For joint issuers, as the intermediate level bonds are bought byintermediary institutions, to a certain extent it can play a role in the signal transmissionand the information-asymmetry reduction, so the investors will reduce their demand for bond yields. Thereby it will reduce the total distribution cost of joint issuer. On theother hand, for the investors, as the structured credit enhancement changed therisk-taking channel, intermediary institutions take on a part of default risk,so their riskswill reduce. Especially for those priority bond investors, the default risk almost fullyabsorbed by subprime debt and intermediate bonds, their part of the default risk isgreatly reduced.This paper tried to establish a complete enterprise bond credit enhancement system.On the basis of existing research, it still needs further research: first, according to theactual development situation in our corporate bond market, we need to innovate the waysof credit enhancement, explore effective channels that are suitable for China’s currentsituation to develop the credit enhancement; Second, perfecting the operatingmechanism of credit derivatives, establishing the reasonable cost calculation model,accurately reflecting the credit risk transfer mechanism of credit derivatives; Third, onthe basis of comprehensively understanding the credit enhancement operation defectsand hidden risks, researching the effective regulation system, in order to give full play toimprove credit risk management function. |
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