The mainland's worsening credit crunch is driving cash-starved small and medium-sized enterprises (SMEs) to join forces to issue pooled bonds.
Shandong Haiwang Chemicals and Lianxing Carbon, based in Weifang, Shandong province, will jointly issue 200 million yuan (HK$244 million) of pooled bonds with a tenor of three years.
Three other SMEs in Changzhou, Jiangsu province - Changzhou Dongfeng Agricultural Machinery Group, Changzhou Shende Seamless Tube, and Xinhua Chang Group - will also jointly issue 260 million yuan of three-year bonds.
What is unique about the pooled bonds is the support of the local government and the People's Bank of China in getting SMEs into groups to obtain debt financing, according to the Changzhou bond prospectus.
Although Xinhua Chang, Changzhou Dongfeng and Changzhou Shende have mediocre credit ratings of A-, BBB+ and BBB respectively, their pooled bonds secured the top credit rating of AAA, thanks to local government support. The pooled bonds of the two Shandong SMEs also have the top AAA credit rating.
'Since the tightening of monetary policy in 2011, various banks have reduced lending by a large amount and our future financing pressure has increased. And there is a risk of weak, indirect financing ability,' said the Weifang bond prospectus.
Bruce Richardson, an American businessman in China, said SMEs in Shanghai were experiencing tight cash flows. 'It started three months ago and I suspect this is nationwide,' he said. 'When businesses call to collect accounts receivable [money that clients owe businesses], it is urgent. They needed cash because they were suffering financial duress. There was a definite uptick in the urgency for payment among SMEs.'
According to the Changzhou bond prospectus, there is uncertainty over accounts receivable for Changzhou Dongfeng and there is a risk of them declining in value.
Changzhou Shengde also faces losses if accounts receivable are not collected on time.
From the end of 2010 to September 30 last year, Changzhou Dongfeng's accounts receivable surged 130.54 per cent; Changzhou Shende's accounts receivable rose 40.9 per cent, and Xinhua Chang's rose 32.6 per cent.
Because cash flow was tight, Changzhou Dongfeng's short-term debt soared 71 per cent from 601 million yuan in 2008 to 1.03 billion yuan on September 30 last year. The firm also suffered a net operating cash outflow of 128.66 million yuan in the first nine months of last year - in contrast to a net operating cash inflow of 225.45 million yuan in 2010 and of 189.59 million yuan in 2009.
'The net operating cash flow can affect the company's financing channels and stability, and negatively impact its production and financial situation,' said its prospectus.
The approximate percentage of the mainland's gross domestic product that SMEs generate. They also account for 80 per cent of jobs